Novartis AG (NVS) 2002 Q2 法說會逐字稿

Good afternoon. My name is Cherette, and I will be your conference facilitator today. At this time I would like to welcome everyone to the Chiron second quarter 2002 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star then the number 1 on your telephone key pad. If you would like to withdraw your question, press star then the number 2 on your telephone key pad. Thank you.

Ms. Lonergan, you may begin your conference.

Thanks, Operator. Good afternoon. And welcome to Chiron's second quarter conference call. On behalf of the Chiron team, we'd like to introduce you to our principal speakers today. Jim Sulat, our vice president and chief financial officer, and David Smith, our vice-president and finance. I'm Joyce Lonergan, our vice-president, corporate development and investor relations. I'll be available after the call today, along with Martin Forrest and the investment relations team, to answer any questions you might have. Before Jim begins his discussion of Chiron's results, we'd like to remind you that our market today includes forward looking statements related to future events and the financial performance of the company. Actual events in performance may differ materially from our expectations. We refer you to the documents that we filed with the SEC. These documents include the 2001 10(k), our first quarter 10(q) report and the upcoming second quarter 10(q) report. All the filings include information under the heading Factors That May Affect Future Results [inaudible] portion of the document. This information identifies important factors that could cause the company's actual performance to differ from our current expectations, including the outcome of clinical trials, regulatory review, manufacturing capabilities and manufacturing and marketing effectiveness. Consistent with the SEC regulation SE, we do not undertake an obligation to update the forward looking information that we are giving you today.

With that, we will turn the call over to you, Jim.

Thanks, Joyce. Good afternoon, everybody, and welcome to Chiron's second quarter earnings conference call. As you can see from today's press release, Chiron had a strong quarter generating high quality earnings and showing solid growth in our businesses. Today when reporting second quarter pro forma net income from continuing operations of 29 cents per share, up 38 percent from the same period last year. Each of our three units performed well, highlighting the value of our diverse business model and stability to deliver shareholder value on a consistent basis, even in a difficult market environment. Chiron's second quarter results also demonstrates that we are building our business by investing a key product franchises. Total revenues were 299 million, compared to 261 million in the same period last year, an increase of 15 percent. Total product sales were 211, an increase of 21 percent over the same period a year ago. The commercial launch of Procleix in the U.S. as we said would be a major revenue driver this year has gone smoothly and fully matched our expectations. All U.S. customers have successfully implemented conversion to in vitro diagnostic products, and all contracts with our customers have converted to commercial pricing. We are seeing strong growth in Europe for TOBI. And Betaseron continues to perform well in an increasingly competitive market. All in all, our operations are performing effectively and our businesses have been growing at a steady rate. Chiron is also building for its future through its development portfolio. As you know, Chiron's strategic focus is on cancer and infectious disease, developing product candidates using our three research platforms, small molecules, proteins and vaccines. We have promising programs that are advancing in oncology and infectious disease across all of our business units, and these programs represent significant new opportunities for Chiron to grow. I want to comment briefly on the performance of each of our business units this quarter as well as provide you with an update on certain of our development programs. David Smith, who will follow me, will provide more detailed financial results for our commercial operations. Let me begin with our BioPharma business. This business shows significant growth in the second quarter. Revenues, including Betaseron royalties, were 21 percent higher in this quarter versus the same period a year ago. TOBI sales in Europe has been particularly impressive as the launch there continues to gather momentum.

TOBI also continues to grow in the U.S. market and we are seeing positive trends in product penetration and utilization across all patient segments. Our marketing and educational materials have been key to this aimed at building awareness among physicians of the advantages of chronic TOBI usage for asymptomatic and mild patients and improving patient compliance across all severities. In the multiple sclerosis market the second quarter introduction of our new room temperature formulation of Betaseron significantly increased sales, reflecting both the new product's premium pricing and stocking by distributors. Betaseron's performance is further helped by two other important factors, strong clinical results and M.S. market expansion as awareness of the disease increases. , patient education initiatives, earlier diagnosis and earlier treatment. Both the evidence and income in clinical trials underscore Betaseron's clinical message. The higher and more frequent dosing beta interferons is associated with the higher percentage of M.S. patients remaining relapse free. Results from these two trials were presented earlier in the quarter at meetings at the American Academy of Neurology in Denver and the European Neurological Society in Berlin. [Inaudible] common trial two-year perspective randomized study concluded that high dose Betaseron administered every other day is more effective than Avanex [phonetic] given once a week. These data were published in the April 27th edition of the Lancet and are another example of the multiple studies that support the value of Betaseron in this market. Our partners Berlex [phonetic] and Schering AG are investing with Chiron in development to further differentiate Betaseron. Additional studies are underway to understand the value of higher and more frequent dosing and early diagnosis. Beyond study, the pilot phase which is scheduled to begin before the end of the year will include 2,000 M.S. patients and is designed to compare standard dose to double dose Betaseron. Initially, the Italian M.S. society which has already completed the [inaudible] study will begin the optimist's study to analyze the effect of higher dose Betaseron in patients with inadequate response to standard Interferon therapy. Lastly, the benefit trial sponsored by Schering AG and started enrollment in the last quarter is intended to identify the effect of early treatment on new M.S. patients prior to their second attack. We believe that Betaseron will continue to compete effectively in the M.S. market because of the product's efficacy profile, a complete set of educational services and patient support programs that our partner Berlex has launched this year. , and future product enhancements that will make administration easier and faster, including a prefilled [inaudible] syringe with an auto-inject feature to be introduced in the U.S. next year.

The cancer area, sales of our leading cancer product, Proleukin, were about equal to the same period last year. During the second quarter Proleukin celebrated its 10th anniversary as a commercial product in the U.S., and in that time Proleukin has become established as an effective anticancer agent. We now know more about immunology and the role of this molecule than ever before and we're optimistic about its role in immune-based therapies. Two development programs are underway to build on Proleukin's value as an immune system modulator and expand its potential applications. Our Silcat [phonetic] trial is a pivotal study designed to determine if intermittent cycles of IL-2 improved clinical outcomes in advanced HIV disease compared to anti-retroviral therapy alone. We are also examining the ability of IL-2 to expand and activate TD-4 cells with the goal of enhancing cellular immunity. During the second quarter the cell cap Data Safety Monitoring Board reviewed the one-year follow-up data on the first thousand patients enrolled in the study, and we're pleased to report. That the DSMB identified no safety concerns with the trial and recommended that enrollment proceed to 2,000 patients. We continue to expect that the cell cap study will conclude follow-up in 2006.

As part of our oncology franchise, we are also conducting a program to evaluate the potential of IL-2 to enhance the efficacy of Retucsin [phonetic] and potentially other anticancer monoclonals and development. Current data suggests that monoclonals may exert their anticancer activity in part by antibody dependent cell mediated cytotoxicity that may be enhanced by IL-2. These lung clinical results are consistent with this hypothesis. Complete results of our phase 1 IL-2 Retucsin studies and non-Hodgkins lymphoma patients were presented [inaudible] earlier this year. This program is being advanced to phase 2 where Retucsin refractory patients with low-grade lymphoma as well as patients with high-grade lymphoma will be studied. Additional phase 1 study is being undertaken at NHL patients using our next generation IL-2 formulation. We're looking forward to evaluating the initial results from these trials next year.

Our oncology portfolio is balanced between programs of known mechanism of action and those that represent novel mechanisms. We are awaiting final results of our phase 2 program for Angiozyme [phonetic], and anti-agiogenic. Angiozyme is being studied in colorectal cancer as combination therapy with standard chemotherapy and the next milestone will be reviewed as a result of this study. During the quarter our partner RPI terminated the breast cancer study, which did not achieve a meaningful response rate as mono therapy. With regard to tetrocytobene [phonetic], the product we acquired as part of the matrix pharmaceutical acquisition earlier this year, we anticipate that our phase 2 studies in patients with gastroesophageal cancer and colorectal cancer will begin by the end of 2002. In the preclinical area, we're bringing forward our growth factor Chynase [phonetic] inhibitor for clinical development. The is the first anticancer small molecule development candidate from Chiron's discovery program. It illustrates that we are executing on our strategic focus in oncology and our strong molecule capabilities are yielding results. We are currently completing preclinical studies, and assuming satisfactory results. , we hope to file an IND in 2003. We are also seeing similar progress. In our inhaled antibiotic franchise. Our collaboration with Inhale Therapeutics in the development of a dry powdered formulation of Tobramycin, with a treatment of [inaudible] infection in cystic fibrosis patients. Is progressing satisfactorily. The dry powder formulation is designed to enable portability and reduced administration time. Phase 1 studies for the dry powdered Tobramycin product are expected to begin in early 2003. We are also beginning our second collaboration with Inhale to develop an inhalable antibiotic product based on our proprietary compound PA 2794. The antibacterial spectrum of this compound differs from TOBI and should allow us to explore new areas of unmet need. Our phase 2 study of TOBI in patients with acute exacerbations of chronic bronchiectosis is underway. Still some prior studies in patients with stable disease which have demonstrated a strong micro biological effect. The collection of patients with acute exacerbations for further study is expected to optimize TOBI's benefits and is consistent with current practice. These lung results have been published and stage 2 results are being prepared for publication.

We now move to our vaccine business. Delta vaccines were 73 million in the second quarter of 2002 compared to 75 million in the same period last year, a 3 percent decrease. In line with our expectations Menjugate sales are lower than the previous year. As we said last quarter, Menjugate is a tender driven business and vaccination programs have been catching up with the needs of countries like the United Kingdom, Canada and Ireland, where meninges disease is significant concern. At the same time, however, new countries are addressing this major medical need. In the second quarter sales of Menjugate began in France and we continue to see sales of Menjugate elsewhere, including in Spain. Moreover, vaccine sales other than Menjugate grew 7 percent compared to the same period last year. We saw particularly strong growth for our tick borne encephalitis and polio vaccine. As you know, we're working to expand our meningococcal franchise, and I'd like to tell you a little bit about the progress. We're making toward that goal. Meningococcal sero types Y, C and B are the major causes of disease in the U.S. and Europe, and Chiron is committed to developing vaccines for these sero types. In its two plus years as a commercial product, Menjugate has helped to reduce death in the United Kingdom due to meninges infection by more than 80 percent. Chiron is building on its work with Mensee to develop vaccines for the other principal meningococcal sero types. Our phase 1 Men-B vaccine entered testing during the first half of the year. This vaccine incorporates our genomics technology and is designed to be effective against multiple subgroups. [Inaudible] immunogicity information will be available next year. New Zealand Ministry of Health selected Chiron to develop a conventional strength specific Men-B vaccine that is now in phase 1 testing. We're also working with the Norwegian Institute of Public Health to develop a Men-B vaccine effective against Norwegian strains in combination with Men-C. Later this year we expect to begin clinical testing of a multivalent of ACYW conjugate vaccine. The goal of this problem will be to develop a polyvalent conjugated vaccine that, unlike the current available polysaccharide vaccine, induces immunological memory and is suitable for pediatrics. Use.

Some of our early stage vaccine candidates are also making progress. Chiron's HIV vaccine is anticipated to be ready for phase 1 testing in early 2003, and development for this vaccine has been supported by the NIH. Chiron's HCV vaccine is in pre-clinical development, and we're working with collaborators to determine safety and immunogenicity of our lead candidate. This information will be useful in selecting the most promising development candidates to take forward.

Now, with regard to our blood testing business, in the second quarter we began to see the financial effects of the FDA approval of Procleix in February of this year. For the quarter, Procleix product sales are 29 million, nearly tripling over the same period last year. At the time of approval we set a goal of achieving conversion to commercialization within one quarter. This concluded the negotiation of new contracts, the transition from investigational to commercial product, and the establishment of a new higher level of pricing in the marketplace. Blood testing group has done a superb job in working with our customers to launch the product in the United States, and we're also beginning to see new customers in the U.S. who wish to use our approved assay, leading to an increase share of the market. With the U.S. conversion complete, blood testing is focusing on ways to further grow its franchise. The principal drivers of future growth in the blood testing business will include new assay developments and geographic expansion. Our ultrio [phonetic] triplex assay which will add hepatitis B to our existing assays or HCV and HIV, is expected to begin trials in Europe late this year and in the U.S. next year. HBV Assay has the potential to close the window period between detection lab to 20 days over currently available tests. NAT is the gold standard for blood testing technology and as such leading blood centers worldwide are adopting the Procleix system. The geographic expansion of Procleix continues well with commitments received in the second quarter from Belgium and Hong Kong. In Brazil we're working with a partner to implement plans for roll out of Procleix, major blood screening vendors. NAT is also under evaluation in China, Taiwan and Thailand.

This has necessarily been kind of a quick tour of Chiron's range of activities, both from a commercial and a product development perspective before I turn the call over to David for review of second quarter results of operations let me make a couple of overall observations. I think it's noteworthy that Chiron has been able to deliver attractive current financial returns while advancing broad development front. Progress I've been describing for you represents, we believe, an unusually rich opportunity that builds or business in the long term. We need to continue to strike the right balance between short term results and long term investment, a balance that remains the central part of the challenge for all companies in this industry. We think our track record is good in responding to that challenge and we look forward to reporting to you in our progress in managing us into the future.

Now let me turn the call over to you, David.

Thanks, Jim. I'll begin with the review of the results for the quarter which were released today at approximately 1:00 p.m. Pacific daylight time. All earnings per share amounts discussed today refer to the pro forma diluted per share earning. As we have discussed, we present our financial results on both annals reported gap basis and a pro forma basis. The adjustments we made this quarter to arrive at pro forma earnings consist of the amortization expense on acquired identifiable intangible assets related to the passage edifice acquisition and the Chiron bearing acquisition. The adjustments made in the second quarter of 2001 consisted of the amortization expense on good will and acquired identifiable and tangible assets related to the pathogenesis acquisition, and discontinued operations associated with the sale of our diagnostics and vision businesses. For the second quarter of 2002 Chiron reported pro forma income from continuing operations of 56 million or 29 cents per share. This result was approximately 38 percent higher than the earnings per share of 21 cents reported in Q2, 2001. Total revenues for the second quarter of 2002 increased 15 percent to 299 million from 261 million for the same period in 2001. Product revenues increased 21 percent to 211 million from 174 million. Increases in sales were seen in TOBI, Betaseron, TVE, polio and Procleix. As expected, Menjugate sales were lower than the second quarter of 2001. Excluding the impact of Menjugate in both quarters, product sales grew over 27 percent. Equity and earnings was up on strong joint business profits, collaborative agreement revenues decreased as expected due to the Novartis funding which ceased at the end of 2001. Royalty and other license fees increased 11 percent, primarily due to the HCV and HIV product royalties from our intellectual property portfolio. Revenues decreased due to the timing of contract manufacturing activities and grant revenues. Gross margins increased to 64 percent from last year's gross margins of 63 percent. Research and development expenses for the second quarter of 2002 totaled 84 million, down 1 percent from the second quarter of 2001. There was a decrease in research and development expenses due to TIP-V [phonetic], as the trial concluded in the fourth quarter of 2001. This was offset by increases for the development of TOBI, Hexosidobene [phonetic], our monoclonal antibody strategy, and our meningococcal franchise. SG and A expenses for second quarter 2002 totaled 71 million as compared to 61 million in the second quarter of 2001. Increased SG and A expenses are due to our continued investment in and defense of our patents and technology, support for the market penetration of TOBI in Europe as well as the commercialization of Procleix. Our estimated full year effective tax rate is 27 percent as we communicate in the last quarter's call, the tax rate decrease which was expected reflects the implementation of several tax planning strategies late last year. Now I'd like to move on to a review of business unit financial results starting with our biopharmaceuticals unit.

Total biopharmaceuticals, product revenues including Betaseron royalties were 115 million in the second quarter of 2002 up from 95 million over the year ago quarter, a 21 percent increase. This increase was primarily driven by TOBI and Betaseron sales. Our second quarter TOBI sales were 34 million, up 44 percent from the year ago period due to the increased patient demand and compliance in the U.S. price increases, and a progress of the TOBI launch across E markets in Europe including Germany, Spain and France. Second quarter sales of Betaseron including the royalty earned from the sale of Betaseron by Schering in Europe were 45 million versus 37 million last year, an increase of 22 percent. In the second quarter of 2002 we experienced some stocking by distributors fall room temperature formulation. Second quarter sales of pro luke an were 28 million comparable with the year ago period. Gross margins in the biopharmaceutical segment increased from 72 percent from last year's gross margins of 68 percent. This increase was primarily product sales and pricing increases taken in the first quarter. Now turning to vaccines, the second quarter of 2002 total product revenues for the vaccines business were 73 million versus 75 million in the same period last year. We recognize 10 million of Menjugate sales this quarter compared to 16 million in the second quarter of 2001. However, it's also important to note the growth in the rest of our vaccines portfolio with sales up 7 percent year over year. EPE did well in Germany not for profit agencies and developing markets such as India. Gross profit for vaccines was 61 percent, down from the 65 percent reported in the second quarter of 2001. This was a result of a additional product reserves in the second quarter of 2002 due to various issues, including seasonality patterns, excess and obsolete inventory and production yields. In addition, last year's gross margin represented the benefit of the heavily weighted average of Menjugate's higher gross margin in the product mix.

Moving on to blood testing, blood testing total revenues including product sales in the joint business, collaborative agreement revenues, and royalty and license fees increased to 77 million in the second quarter of 2002 from 43 million in the year ago period, a 79 percent increase. This increase was primarily due to the higher product sales of Procleix over a year ago as well as the royalty revenue for the use of HCV and HIV intellectual product and blood screening. Product revenues recognized in the second quarter of 2002 include the commencement of commercial pricing in the U.S. for Procleix and continue penetration into several markets abroad. Procleix will continue to drive substantial growth in this business unit.

Now in summary, let me take a moment to highlight our view of the second quarter and some key events that took place. Product sales were up over the prior year. Procleix made the move to commercial pricing during the quarter or we're pleased with the progress made since approval and awarded the contribution for this important product over the second half of this year. TOBI also showed good growth over the prior year with the roll out from Europe and increased demand in the United States. Operating expenses continue to be a focus point, but we are not holding back in opportunities to invest in the business we are please with the growth and operating income of the prior year and Q1 of this year. All businesses contributed growth this quarter. The delivery of these results is indicative of substantive nature ask diversity of our business model. Our previously issued guidance of earnings per share between the dollar ten and dollar 20 remains unchanged. Our performance in Q2 gives us the continued confidence that we will hit this goal. As we have noted in the past, we expect the second half to be higher in earnings per share than the first. 2002's milestones are significant and we are focused on meeting them. From our affirmed earnings per share guidance to our goal of ten clinical advances we will continue to challenge ourselves and leverage the advantages of our business month model. All this is consistent with our focus on long term growth and increasing shareholder value.

I'd like to turn call back to Joyce now.

Thanks, David. That concludes our prepared remark. Now we'd like to open up the call for questions. As we do so, we're joined by Bill Green, our senior vice president, general counsel and president of Chiron blood testing, and Bruce Scharswitt [phonetic], who is our vice-president of clinical development. These folks will provide assistance to us during the Q and A, and as always, Martin Forrest and the investor relations team and I will be available after the call to address any further questions you might have.

With that, Operator, let's open the call for 00:28:36 questions, please.

Okay. And at this time if you do have a question, please press star and the number 1 on your telephone key pad. We'll pause for just a moment to compile the Q and A roster.

[Pause.]

Your first question comes from Eric Smith of SG Cowen.

Good afternoon, everyone. I was wondering if you could tell us a little bit more about Menjugate whether you got any tender orders in the quarter from France perhaps, and what the backlog did in Q2?

There were no major new tenders received in the period, Eric. Our backlog coming out of the end much Q2 is about $22 million.

So you still expect sales in '02 to be half of what they were last year, Jim?

That's still our expectation, Eric.

And then on NAT testing, Procleixs, you mentioned you completed now the conversion to commercial pricing of the. Just as far as helping us model the remainder of the year, did that happen earlier in the quarter or later in the quarter, and what should we expect? I guess a significant jump up in Q3 as you get the full quarter benefit but not more growth in Q4?

Eric, I'm going to let Bill Green take that one because he's probably the best person to respond to it.

Thanks, Jim and Eric, for the question. We believe that the U.S. market is going to continue to grow for us over the next several quarters. As we expand both customer base and which is going on, interestingly, and as we realize the effect of full commercial pricing for the full period. We did not achieve the full commercial pricing at the beginning of the second quarter, but we did do it during the second quarter as we had expected, and therefore the second quarter as Jim had indicated did not reflect full commercial pricing in the U.S. third quarter will. Fourth quarter should see some growth beyond that.

Great. Thanks a lot.

No problem.

Your next question comes from Dennis Harp of Deutsche Banc.

Hi, Dennis.

Thanks for taking questions, and congratulations on a very strong second quarter.

Thanks.

First on Betaseron, how much do you anticipate was inventory stocking in the second quarter?

This is David. You have to remember a couple of things that go on with beta. Rolex made the ships to wholesaler distribution network as you recall was foreshadowed a quarter or two ago. And we also said last quarter that shipments for beta from us to Rolex were somewhat artificially low due to the fact that we were gearing up for the room temperature formulation for beta. So there's been some stocking that's out there, but we view it as more prep for a new product introduction at this point. To be fair, there's noise out there right now for beta with the Reba [phonetic] launch, but it's going to take a couple quarters to kind of shake that all out.

As near as we can tell if we try to filter out all of the changes that we're still comfortable with the guidance given by our partner for Schering low to middle double digit growth this year, but there is as David reiterates, a lot of changes going on and as a result the numbers are a little hard to interpret in any given quarter.

Okay. Then on blood testing, Bill, you mentioned that we should expect growth even in the fourth quarter. Where does that growth come from?

The growth in the United States, while it comes from U.S. growth in customer base, we're continuing to get inquiries from former and current Roche customers to expand our market share. Current market share in the U.S. is about 75 percent. We are pleased to say the first Roche customer, former Roche customer to convert to the Procleix system went effective the beginning of this month. We expect to have additional market share through the end of the year, and some additional transitional price adjustments to ore can you remember in the third and fourth quarter. Main increases in revenues and earnings, beyond the U.S. market of course, is international expansion where I think we're proceeding well with our roll out both in Europe and in the Far East. Jim highlighted some of the countries where we've got serious evaluations underway. We've got customer contacts in many geographies. Overall, the -

[Lost connection at 4:47 p.m. and was reconnected at 4:49 p.m.]

Okay. And one final question, and that is on manufacturing for the flu vaccine for this season. Do you have a good handle on what your yields are and whether you will be fortunate enough to be one of the first suppliers out there in order to achieve your sales target?

Dennis, this is Jim. I think we're comfortable in terms of our yields with the product. That's to be fair, consistent with what we've been saying the last couple of months. I do not know the answer to your second question which is whether or not we expect to be the first in the market. We don't see any major problems in terms of our manufacturing cycles, but at least the scuttlebutt in the industry were that other people were also having comparable success in manufacturing the product. So whether or not we're going to beat other people at this point in time, we simply don't know.

Okay. Great. Thank you.

Your next question comes from Eric Ginsberg of Piper Jeffrey.

Hi, Peter.

Yes, good afternoon. Hi. First on the blood testing side, would you say that the average U.S. NAT customer switched to the new pricing level early, mid or late in the quarter?

They generally switched in the middle of the quarter.

Okay. That's helpful. Thank you. The joint business revenue was up I think higher than it's been in a quarter for a long time. Any reasons for that, with J and J?

Well, the joint business is doing well. Partly that's a question of difficulties with Abbott. But overall the joint business activity has been strong. There were some adjustments in the receipts that we got from or though this year - this quarter and therefore I don't think you can regard this quarter as being a steady run rate period. But we're pleased overall and the long term issue for you is the attractiveness of that business which still remains strong.

Next question, switching to drugs we haven't talked about in a while, FGF, we saw an article recently in the Lancet that actually showed some quite encouraging phase 2 data, appeared to us, regarding FGF, and then in a publication this week the folks at sigh owes had mentioned Chiron was considering a phase three trial of that agent. Can you give us an update on that program?

Sure. Handle that one, Peter.

Thanks.

Actually, the complete results of the phase 2 have not been publish. The results of the AD study were published in Lancet as you mentioned with an accompanying editorial. We thought a lot about this program, and it currently falls outside of our focus areas, cancer and infectious disease. Therefore, we don't plan to do further development ourselves, but are looking at alternative business strategies to monotize [phonetic] this asset.

Thank you very much.

Next question comes from Philip Cross of Adeg Capital.

It's Adage Capital [phonetic]. Most of the questions on NAT have been answered. Can you remind us again what the profit model is of this product in terms of revenue sharing with the partners both on the Roche royalties as well as the product you market yourselves in terms of how it's shared and what kind of operating margin folks are talking about in the business as it comes into the Chiron P and L?

Sure. First on the jump rope relationship, we pay Jim crow a fixed percentage of revenues for their contribution, their contribution includes the manufacture of all the assays and the revision to us of the instrument system. The way of looking at that is our cost of good goods is the amount we pay to Gen-Probes which the fixed percentage of revenues in the 40s. And therefore our gross margin on that business is the conversion of that, a number that is in the mid 50s percent of revenues. The Roche royalties are very attractive. We have not published the royalty numbers, although that information has circulated out in some geographies. It's a number which we had intended to make ourselves, not entirely neutral on who sells the product, but to be close enough that we were willing to gauge our overall success in achieving this market opportunity based upon the rate at which we and Roche together penetrated new available market.

So the Roche royalties are shared with Gen-Probe.

They are not.

They are not. But when you say that they're similar to your own participation in the manufacture product, that's to say net of the Gen-Probe cost of goods?

Gen-Probe cost of goods and our own operating costs.

Your own as well. Your operating cost are they largely fixed from the standpoint of thinking about the incremental revenues coming in as this business grows?

The biggest fraction of them probably are fixed, but there is a very large product support and technical support component that probably has to be measured incrementally.

Okay. The second question is on Betaseron. If your revenue number is right and then in the release you talked about the actual revenues that came from Berlex [phonetic] as well, it sounds like the direct marketing of beta serum was up about a million dollar in terms of nonroyalty business. Am I reading that correctly in terms of that being sort of the U.S. sales growth? Is it sort of flat? [inaudible] the release Berlex laboratory marketing and resale 27 versus 34 and you gave us a total of 45 versus 37 which implies that the non-Berlex portion is the difference there. Am I reading these numbers incorrectly?

I'll pull it out of the press release. I can take a look at it for myself but it doesn't make any sense based on what you told us. Sales and products 34 versus 27, those are correct numbers. And what else were you looking at, Phil?

I thought you gave us 45 million versus 47 as the total Betaseron franchise revenues.

Including royalties.

In your conversation, did I mishear that?

That's correct.

We were including in that conversation was the royalties we received for the product sales outside the United States.

I see. So the royalties are what went up, would be the difference only, and the product sales are 27 versus 34?

Actually the royalties were relatively consistent year over year.

Okay. Okay. Got it. Okay. Great. Thank you.

No problem.

Once again, I would like to remind everyone, if you would like to ask any questions, please press star, then the number 1 on your telephone.

Your next question comes from [inaudible] of Goldman Sachs.

Hi. Most of my questions have been answered. Just two more. One is on conjugate. What is the backlog that you have? And the second is how much of this spares you on sales were due to stocking?

I think you mean Menjugate in your first question, May Kim; is that correct?

NEW SPEAKER:

Yes.

With regard to Menjugate as I mentioned before the backlog is 22 million at the end of the quart ore.

Sorry I didn't get that.

No problem. And with regards to the Betaseron sales, I think David and I tried to answer before, stocking is not insignificant part of the sales increase this quarter, certainly not all of it, but there are so many changes going on in this channel right now, that the fair [inaudible] difficult for us to estimate that number with certainty.

But is it more than 5 million?

I think I probably stand by my initial comment. I mean I wish I could do better for you with that May Kim but the change in the distribution pattern we sort of have two level distribution structures that we have to measure and it's more difficult.

And what are you seeing on the trends for M.S. in Europe? Are you seeing an impact on Paxil?

Paxil is certainly taking market share in Europe, but I don't think there has been any major change in the latest quarter on that.

Okay. Thank you.

Your next question comes from [inaudible] of UBS Warburg.

Hi. In terms of the NAT business, I was wondering in terms of the revenue ramp when you're talking about contracts with the blood banks, obviously what was the revenue ramp since you received approval? That is, what proportion of contract immediately goes back - go up to market value or if they don't what sort of the progression of price increase or revenue increase from those contracts?

Well, Merrill, we're trying to I guess deconvolute the second quarter number here in order to get a U.S. run rate on [inaudible] and I don't think I can get you any closer than we've gotten so far. We've managed to convert the whole U.S. market to a commercial pricing in the second quarter. Some customers came aboard at different times in that period and we've not really deconvoluted that. We do expect there to be continued growth in the third and fourth quarters and we'll see the full effect of the commercial pricing in the third quarter numbers.

Thank you.

No problem.

At this time there are no further questions.

Okay. Let's cut it off at that point, Operator, and let me see if I can make just a couple of closing remarks.

As I said at the beginning, Chiron has delivered high quality earnings in the second quarter which we believe underscores the value of the business model we're pursuing. So a strong total revenue and strong product sales growth while at the same time we made good progress when building our portfolio for the long term. Just a couple of highlights. One is the product sales grew substantially, increasing 21 percent over the same period last year. Margins were excellent. Gross margin operating margin, net income margin all were above last year's levels. And in the product area, as we've been discussing, Procleix made a smooth transition to commercialization over the quarter, but now all of our customers are paying commercial prices and we continue to expect Procleix to be a major driver of our revenue growth in the second half of 2000 and beyond. All of these factors point to Chiron's ability to continue to deliver shareholder value while building a strong pharmaceutical company and generating steady profits. We're confident about Chiron's performance and outlook. And I want to take this moment to thank all of our shareholders and thank all of you to take the time to participate in our call today. Take care.

Thank you for participating in 00:46:57 today's conference call. You may now disconnect.