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.