Novartis AG (NVS) 2002 Q3 法說會逐字稿

Good afternoon. My name is Kia and I will be your conference facilitator today.

At this time I would like to welcome everyone to the Chiron third quarter 2002 financial results conference call.

All lines have been place 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 star, then the number one on your telephone keypad. If you would like to withdraw your question, press star, then the number two on your telephone keypad. Thank you.

I would now like to turn the call over to Ms. Joyce Lonergan. Ma'am, you may begin.

Thanks, operator. Good afternoon, and welcome to Chiron's third quarter conference call.

On behalf of the Chiron team, we'd like to introduce you to our principal speakers today -- Sean Lance, our Chairman and CEO, and Jim Sulat, our Vice President and Chief Financial Officer. I'm Joyce Lonergan, Vice President, Corporate Development and Investor Relations. I'll be available after the call today, along with

and our Investor Relations team, and we'll be here to answer any questions you might have.

Before turning the call over to Sean for his discussion of our results, we'd like to remind you that our remarks today will include forward looking statements relating to future events and the financial performance of the company. Actual events and performance may differ materially from our expectations. We refer you to the documents that we filed with the SEC. These include the 2001 10-K, the second quarter 10-Q report, and the upcoming third quarter 10-Q. All of the filings include information under the heading, "Factors That May Affect Future Results" in the MD&A portion of the documents.

This information identifies important factors that could cause our actual performance to differ from current expectations, including: the timing and outcome of clinical trials, regulatory review, manufacturing capabilities, efficiencies of operations in research and development, the strength of our management team, the effectiveness of our partnerships, and sales and marketing effectiveness.

Consistent with SEC regulation

, we do not undertake an obligation to update the forward looking information that we are giving you today.

With that as a preface, Sean, we'll turn the call over to you.

Thank you, Joyce. Good afternoon and welcome.

Today, Chiron announced its third quarter's earnings results, as well as its decision to

. In today's call, I'll be addressing both our earnings and our clinical plan.

So, let me begin with the earnings. Chiron had an exceptional quarter. Earnings were high-quality, and each of our businesses showed solid growth. Today, we are reporting a third quarter pro forma net income from continued operations of 46 cents per share -- that's up 53 percent from the same period last year.

All three business units performed well, which speaks to the value of our diverse business model, and its ability to deliver shareholder value, even in an uncertain economic climate.

Chiron's third quarter results reflect the expansion of key products in targeted franchise areas. Total revenues were $368 million, compared to $302 million in the same period last year -- an increase of 22 percent.

product sales were $272 million -- an increase of 27 percent over the same period a year ago.

In the third quarter we began to see the full effect of the U.S. commercial pricing for Procleix. Procleix is beginning a mult-year growth phase and will be contributing consistently and substantially to Chiron profits.

The Biopharma unit performed strongly, with revenue increases across all major products. Results for the vaccines business were equally strong, with a solid performance for the

franchise in anticipation of 2003 flu season.

All in all, because of the focus Chiron has brought to its commercial operation, we are now operating with a high degree of efficiency and the businesses have achieved solid growth.

We have further strengthened the management team. I want to highlight one of - one new member of our senior management team who joined us this quarter.

was appointed President of our Blood Testing Division in late August.

brings valuable depth and experience to this position. As former President of

, he not only knows the blood market well, but he's also familiar with Chiron's role in the industry.

will help Chiron take its Blood Testing Division to new levels of success.

I want to take this opportunity to say how grateful I am to Bill Green for the important contributions he made while heading the Blood Testing business. Bill now continues in his role as Chiron's General Counsel.

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 clinical programs and strategies which allow us to more fully participate in targeted franchise areas. Jim Sulat as usual will follow me to provide more detailed financial results for commercial operations.

Let me now begin with the BioPharma business. This business showed significant growth in the third quarter. Revenues including Betaseron royalties were 34 percent higher in this quarter versus the same period a year ago. All major products contributed to this strong increase.

continued to grow - up 16 percent over last year as product penetration and utilization improved across all patient segments. TOBI keeps adding to its strong clinical message. At the North American Cystic Fibrosis Conference earlier this month, two studies highlighted TOBI's benefits. Data was presented at the conference suggesting that TOBI is effective in eradicating the first

in pediatric patients, bolstering clinical awareness of the value of early treatment with TOBI.

In another study of CF patients with mild disease, Chiron learned that patients receiving TOBI were less than half as likely to be hospitalized for lung complications as those who did not. A meeting with study investigators at the conference resulted in the termination of the trial before its completion because of this difference. This difference in hospitalization rates suggests the value of using TOBI in the milder segments of the CF patient population infected with

.

TOBI is the cornerstone of the inhaled antibody franchise. Product improvement and the development of novel compounds such as

will

that franchise. Chief among the improvements for TOBI are the dry powder formulation, which will reduce administration time and a new delivery system to increase ease of use.

we anticipate clinical testing of a dry powder formulation to begin early next year. We also expect clinical trials for

to begin next year.

Betaseron sales in the third quarter have

upwards compared to the same quarter last year. We expect Betaseron to grow in a competitive market due to strong clinical results, the development of new product features, and innovative marketing initiatives. Development of a threefold

syringe which would increase ease of use is underway and targeted for a launch in late 2003.

As an outstretch to patients, our partners

have opened nine BETA centers. "BETA" in this case stands for Betaseron, Education, Training and Assistance.

plans to open eleven more BETA centers around the country. These centers are valuable resources that offer consultations with dedicated nurses and other MS care providers, education for patients and their caregivers, and comprehensive medication training and follow up.

We have seen other changes as well. Chiron will be assuming responsibility for Betaseron manufacturing worldwide. Beginning in the fourth quarter, the transition to Chiron manufactured product will be in

. This manufacturing initiative is one manifestation of a stronger partnership between Chiron and our partner

. Our earnings will be largely unaffected by the transition.

In the cancer area, sales of Chiron's leading cancer product, Proleukin, were higher than the same period last year, largely because of wholesaler buying. Increased high-dose therapy will be a contributor to Proleukin growth in existing indications. Now we also see significant growth potential in the Proleukin franchise through combination therapy with monoclonal antibodies. Four clinical programs are underway to study this combination. They are the Phase II program for Proleukin and

that is currently

in patients with low-grade non-Hodgkin's lymphoma who have failed

therapy. Another Phase II program of Proleukin and

that is currently run in patients with high-grade lymphoma who have failed prior chemotherapy and oral

therapy. A Phase I study in patients with advanced non-Hodgkin's lymphoma, using

in combination with

, which is anticipated to be more potent, more convenient, and better tolerated. A Phase I study of

and

in patients with metastatic breast cancer. Trial

for this program have opened, and we anticipate that involvement to begin shortly.

All of these programs represent an important investment in developing Chiron's Proleukin franchise, and leveraging future growth from it. The oncology franchise outside of Proleukin is also progressing.

is on track to enter Phase II clinical trials, in gastroesophageal and colorectal cancer by the end of the year, or early next year. These trials will study the compounds used as a second-line therapy. In addition, our partner

still expect results by the end of the year for Phase II programs for

to colorectal cancer.

Let me now move to the Vaccines business.

vaccines were $126 million in the

quarter of this year, compared to $115 million in the same period last year, a 10 percent increase. The result is especially impressive when you consider that the third quarter of 2001 saw a large shipment of Menjugate to Quebec for a universal vaccination campaign. Flu vaccine in particular performed very strongly in the third quarter. We estimate the entire season will be up by about 25 percent, but the third quarter was particularly strong with sales up more than 50 percent over a year ago. Flu is an important franchise for Chiron. The Company is a leading player in the flu market in Europe, and we see attractive opportunities for growth within the franchise. Chiron has a unique portfolio of three high quality flu vaccine products tailored to meet the needs of customers.

the subunit vaccines for all age groups, Begrivac, the first preservative-free vaccine and Fluad, the first adjuvanted flu vaccine.

Since 1997 we have seen the flu franchise develop into a significant part of Chiron's business. Market share outside the United States now stand at about 20 percent and we are a major player in important markets. Chiron Vaccines is the second largest player in the flu market outside of the United States after Adventis

. The market is a competitive one and getting to market first is a key success factor. Chiron has met this challenge successfully with a team dedicated to getting our flu vaccines to key markets first each season.

We are committed to expanding this franchise. We believe that we can sell even more flu vaccines than we currently make. In order to expand capacity, we are investing in a cell culture systems that will allow us increased output and flexibility. Menjugate continues to make progress with market expansion. We recently began selling Menjugate in the private sector in Australia. Chiron is progressing with the expansion of the

franchise by building its work with

to develop vaccines for the other principal

seller groups. Chiron's Men B vaccine is in Phase I testing in the United States. It uses genomics technology and is designed to provide broad coverage against various sub-strains. Currently, there is no broadly protective Men B vaccine available in any market.

We are using conjugate technology to develop an Men ACYW vaccine. Phase I testing for this vaccine is underway in Europe and we expect the first patient within the coming week. Unlike first generation vaccines, this vaccine has a potential to offer protection across multiple strains and could be effective in infants, filling an important medical need.

Our early stage vaccine candidates are also making progress. Chiron's HIV vaccine should be ready for Phase I testing in early 2003. Development of this vaccine has been supported by the NIH. Chiron's HCV vaccine program is also progressing. Clinical trials have begun in Australia with a candidate developed in collaboration with our partners, CSL. In another collaboration with St. Louis University we plan to begin clinical testing of a second vaccine candidate next year. Our prophylactic

vaccine showed satisfactory safety and

in Phase I in adults. The results were presented last May at the Digestive Disease Week conference in San Francisco.

I'll move on now to the blood testing business. The first quarter was the best ever for blood testing. In the quarter we saw the effect of commercial pricing for Procleix. The Procleix product sales were 36 million, a 22 percent increase over the second quarter and 147 percent increase over the same period last year. With the successful launch of Procleix in the United States, we are turning our attention to the next areas for growth. Some of that growth will come from greater market penetration, the addition of new markets for Procleix, and the introduction of new tests. Market share in the United States continues to grow as new customers move to Procleix. Nucleic acid testing has become the gold standard in the blood industry, and more than 20 abstracts presented at the International Society of Blood Testing meeting in Van Couver last August highlighted the value of Procleix.

In addition to product enhancements, Chiron will

in blood testing in franchise through

development.

The first

that we anticipate adding will detect Hepatitis B virus in whole blood donations. The Procleix

system,

will fill an important, unmet market need. A symposium at the

highlighted the potential of

. In tests by the Italian Red Cross,

closed the window period between infection with

and detection from 59 to 34 days, and was able to detect all known

.

will enter clinical trials in Europe early next year, and in the United States -- late next year. We expect to file the

after this clinical trial is completed. We would see a possibility of

generating revenue as soon as late 2003 in markets outside of the United States.

in

are being considered for West Nile Virus, and Parvo B19 virus, both of which have garnered significant FDA interest over the past several months. Additionally, at a meeting last month, the Blood Products Advisory Committee of the FDA took up the issue of nucleic acid testing on an individual donor basis. The committee recognized that individual donor testing, or IDT, is technically feasible, but represents operational challenges for the largest blood

. Chiron and its collaborator,

remain committed to supporting the blood testing market as it moves towards individual donor testing. To help this move, we are working on upgrades of the

system. We believe these upgrades will require a

of

application, which we expect to begin filing next year on a rolling basis.

Now, I'd like to talk about the decision announced today to terminate the programs for

immunotherapy.

The primary endpoints for the

trial is first

to finding a

. Since this trial was planned in 1998, we have seen major improvements in highly active

therapy, or heart as it is

. This has been a great benefit to patients, but as fewer and fewer patients experience clinical events and disease progression, measuring the difference between patients receiving

and those who are not has become harder. This has made it necessary to increase the size of the trial from 1,400 patients to a projected 2,000. And we did not anticipate clinical results until 2007 at the earlier.

Chiron has decided that the trial is unlikely to generate a positive outcome based on the duration of time and the allocation of resources that the trial required. For these reasons we have decided to end the trial, and we are working with regulatory authorities to pursue a possible submission. Based on data from the

program, we believe

will meet an important medical need in patients who do not achieve immunological response while

. Our hope is to seek regulatory approval quickly to benefit those patients.

We have also made a decision on our

- a program that Chiron has been conducting finally in Asia. We continue to believe that this program has potential and have been working to find partners. However, given the challenges of conducting a clinical trial in Asia, we have decided to discontinue the program.

Chiron has also decided to end Phase II program for

, a compound for

negative infection in CF patients. Despite acceptable antibacterial activity,

formulation represented development challenges for us. We have concluded that our focus should be on the development of the dry powder TOBI formulation and

as the best way to grow the franchise in the near term.

Before I turn the call over to Jim for a review of the third quarter results of operations and discussions of the financials, I'd like to highlight some of the important points. In a difficult market, it's important to focus on what matters - product development, product introduction, and product marketing. As this quarter illustrates, Chiron is committed to these fundamentals, which is what allows us to deliver strong financial returns and to grow our shareholder value.

The value of that commitment is reflected in our stock performance. During the quarter, Chiron performed better than Nasdaq - better than the Nasdaq Biotech Index and the S&P500.

continued to strengthen and expand our franchises while focusing on solid financial results, we think Chiron represents an

opportunity for investors.

Let me now turn the call over to Jim.

Thanks, Sean.

I'll begin with a 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 earnings. As we've discussed previously, we present our financial results on both an as reported, that is 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 acquired identifiable intangible assets related to the

acquisition and the Chiron

acquisition and discontinued operations associated with the sale of our diagnostics business. The adjustments made in the third quarter of 2001 consisted of the amortization expense on goodwill and acquired identifiable intangible assets related to the

acquisition, and discontinued operations associated with the sale of our diagnostics and vision businesses.

So, to the third quarter of 2002, Chiron reported pro forma income from continuing operations of $89 million or 46 cents per share. This result was approximately 53 percent higher than the earnings per share of 30 cents reported in the third quarter of 2001. So, the revenues for the third quarter of 2002 increased 22 percent to 368 million from 302 million for the same period in 2001. Product revenues increased 27 percent to 272 million from 214 million. Increases in sales were seen in Proleukin, TOBI, Betaseron,

, and Procleix. As expected, Menjugate sales were lower than the third quarter of 2001. And if you exclude the impact of Menjugate in both quarters, product sales grew over 39 percent. Equity and earnings was up, primarily due to strong joint business profits. Collaborative agreement revenues decreased as expected due to the

-related revenues, which

at the end of 2001. Royalty and other license fees increased 8 percent, primarily due to the HCV, HIV product royalties from our intellectual property portfolio, and other revenues were consistent with third quarter of 2001. Gross margins increased to 65 percent this year from last year's gross margin of 53 percent. Research and Development expenses for the third quarter of 2002 totalled 82 million, up one percent from the third quarter of 2001. There was a decrease in R&D expenses, due to

as that trial concluded in the fourth quarter of 2001, and this was offset by increases for the development of TOBI,

our monoclonal antibody strategy, and our meningococcal franchise.

SG&A expenses for the third quarter of 2002 totalled 68 million, as compared to 62 million in the third quarter of 2001. Increased SG&A expenses are in line with the increased sales level, and reflect marketing and investment in all of our businesses. Our estimated full-year effective tax rate remains at 27 percent.

Now I'd like to move on to a review of the business unit financial results, starting with our Biopharmaceuticals unit. Total Biopharmaceuticals product revenues, including Betaseron royalties were 115 million in the third quarter of 2002, up from 86 million over the year-ago quarter, a 34-percent increase. We saw increases in Proleukin, TOBI and Betaseron sales. Our third quarter TOBI sales were 39 million, up 16 percent from the year-ago period due to increased patient demand and compliance in the US, price increases, the progress of the TOBI launch across Europe, wholesale ordering patterns, partially offset by an increased level of Medicaid rebates.

Third quarter sales of Betaseron, including the royalty earned from the sale of Betaseron by

in Europe were 38 million, versus 30 million last year,. an increase of 27 percent, due to increased patient demand, price increases, and wholesale ordering patterns. Third quarter sales of Proleukin were 32 million, up 96 percent from the year-ago period, primarily due to wholesale ordering patterns and price increases.

Gross margins in the Biopharmaceutical segment increased 77 percent from last year's gross margin of 69 percent. This increase is primarily the result of product mix of biopharmaceutical product sales and price increases taken earlier this year.

If I could turn to Vaccines now, in the third quarter of 2002, total product revenues for the Vaccines business were 126 million versus 115 million in the same period last year. We recognized 6 million in Menjugate sales this quarter, compared to 23 million in the third quarter of 2001. We currently expect Menjugate sales from 2002 to be about 40 percent of what they were in 2001, and with the current backlog at the end of the third quarter of about $24 million in Menjugate, most of which we expect will ship this year, we're comfortable with that estimate.

We recently began shipping Menjugate to the private market in Australia, and expect to see sales there in the current quarter; however, it's also important to note the growth in the rest of our Vaccines portfolio, with sales up 30 percent year-over-year. The flu vaccine was the main contributor to the increase in the third quarter of 2002. Increase in flu vaccine sales was primarily a result of better yields, being first to market in Germany, sales to new countries such as China, and increased sales to existing countries such as Germany, South Korea, the UK, Spain, Ireland and Italy, due to an increased awareness in the overall flu vaccines market. Gross profit for vaccines was 61 percent, down from the 63 percent in the third quarter of 2001. Last year's gross margin represented the benefit of the heavily weighted average of Menjugate's higher gross margin of the product mix.

The third business, blood testing, total revenues including product sales, equity in the Ortho joint business, collaborative agreement revenues, and royalty and license fees increased to 89 million in the third quarter of 2002 from 53 million in the year ago period, a 68 percent increase. This increase is primarily due to higher product sales of Procleix over a year ago, as well as increased equity in earnings due to strong joint business profits and higher royalty revenue for the use of HCV and HIV intellectual property and blood screening diagnostics. Product revenues recognized in the third quarter of 2002 include a full quarter of commercial pricing in the U.S. for Procleix and continued penetration in several markets abroad. Procleix will continue to drive substantial growth in this business unit.

So in summary, let me take a moment to highlight our view of the third quarter and some key events that took place. Obviously, it was an excellent quarter from a financial perspective, with revenues, margins and earnings well above our expectations and, I suspect, yours. Particularly gratifying is that the increase has occurred in all of our businesses and the quality of earnings were high throughout the Company, underscoring, once again, the unique strength of Chiron's diversified business model. Revenues were particularly strong with product revenues up 27 percent and total revenues up 22 percent, reflecting growth in all three of our business units. Operating expenses were well-controlled, but we continue to invest in key parts of the business. Finally, we believe that the strong financials for Q3 will result in full-year earnings above expectations and, hence our announcement last week that we are revising our 2002 pro-forma earnings per share guidance upwards of a range of $1.10 to $1.20 per share to a new range from $1.25 to $1.30 per share.

Turning now to guidance for 2003, our

for pro-forma earnings per share in 2003 is $1.40 to $1.50 per share. Total revenues are expected to be between 1.4 and 1.5 billion. We expect product revenue to be in the range of 1 to 1.1 billion with growth across all business units. Gross margins are expected to be consistent with 2002 on a company-wide basis. Operating expenses are expected to be higher by approximately 10 percent and we expect our tax rate to be at, or slightly lower, than it was in 2002.

Now, as most of you know, Chirion is committed to a long-term average annual growth rate of 25 percent, and we have more than delivered on this commitment. Since 1999, when we first publicly expressed our earnings growth goal, our compound annual growth has been in the range of 27 percent per year. We hope by repeated delivery on our commitments, here and elsewhere, Chiron has established a reputation for credibility and reliability. However, as we look out over the next two to four year increment of time, we believe we need to revise our earnings growth goal downwards, from 25 percent to 20 percent per year. This is a result of both decreased growth in our top-line revenue and an opportunity to support an array of attractive development programs as they mature into later and more expensive phases. As before, this 20 percent annual growth target will be an average over the period and individual year's results may be higher or lower than this average goal. In particular, we expect 2003 to be below this trend, but solely as a result of our new higher earnings expectations for 2002.

We look forward to delivering on this new growth commitment with the reliability and consistency with which we delivered on prior commitments.

Joyce?

Thanks, Jim.

That concludes our prepared remarks. Now we'd like to open the call up for questions. We're joined today for the call questions by Bill Green -- Bill is our Senior Vice President and General Counsel; Craig Wheeler, President of Chiron BioPharmaceuticals; Jack Goldstein, President of Chiron Blood Testing. David Smith is our Vice President of Finance, and Bruce

, Vice President of Clinical Development. As always,

and the Investor Relations team and I will be available after the call to answer any further questions you might have.

Yes, if we could open up the call for questions, we'll begin now.

At this time, I would like to remind everyone that if you would like to ask a question, you press star one on your telephone keypad now.

We'll pause for just a moment to compile the Q&A roster.

The first question comes from

of Goldman Sachs.

Hey,

.

Hi. A question about the pipeline. The termination of the three projects -- will it have a significant impact on your R&D spending next year? And secondly, are you gonna meet your goal of 2002 of advancing 10 clinical projects?

I'll take the first part of the question. No, I expect we're gonna continue to increase our spending on R&D as we have in the past. Our expectation is that R&D expenditures will continue to go up in line with the rest of our expenditures in the years to come. But, no, it's not a decrease in spending which is driving -- which those results will be driving.

On the subject of the clinical advances for year 2002 -- perhaps what I could do is turn the call over to

and let him give you a summary of that,

.

OK. Thanks.

, as you mentioned, our target for the year was 10 program advances, and we're tracking toward that objective. At this point, we've recorded seven -- mostly phase one and phase two, is what was

approval, with additional advances anticipated for the end of the year.

So, that's where we stand currently, and we'll keep folks advised at the yearends.

Can you refresh our memories which seven it is?

Correct.

(I).

In phase one, they include the beginning of the

study. We've recorded the

, which we anticipate to getting within the next week. We've begun official testing, phase one safety

of our

vaccine -- that's in collaboration with our partners. We have begun phase one program for second generation formulation of

in patients with

. We've also begun phase two testing of

in patients with

. We'll begin imminently testing of our second generation formulation

in combination with

in patients with breast cancer, and also have the Procleix approval. We anticipate the

testing to begin in the fourth quarter of this year.

Thank you.

The next question comes from

or Morgan Stanley.

Hi,

.

Hi. This is

for Caroline.

I'm just interested in if you could detail the key drivers for earnings in '03.

Sure. Unfortunately, that's not a short answer. You know, you know our business well enough to know that we have a fairly diversified business model, and we, frankly, expect, as I said in the script to increase sales across all three of the business units. So, you know, there's a long list of answers to that general question.

I think probably the single largest contributor to it is probably going to be our Procleix business which you've obviously seen through the approval earlier this year and then the full financial results of that commercialization - commercial level of pricing in the third quarter of the year.

Maybe what I can do is turn - turn that question over to John Goldstein so he can give you a little more context around what some of the things are that are going to drive that overall growth in NAT.

Thanks, Jim. Well, a couple of things.

One is the full commercial - full year for commercial pricing of Procleix - I think that's an obvious one. Second is additional market share both in the U.S. and Europe. For example, we've added a couple of countries over the past couple of months, such as Belgium and Poland and some additional market share in some other European countries. And some additional countries as well, we're anticipating in Southeast Asia and Asia.

In addition to that, we're expecting at the very, very end of the year some

sales in non-regulated countries, particularly in some of the European countries.

Thank you.

The next question comes from Dennis Harp of Deutsche Bank.

?

Hi,

.

Thanks for taking my question, and congratulations on a very good quarter.

I wanted to see whether, Jim, you could break out a little bit for us on the Blood Testing business, which you say all told brought in 89 million for the quarter, what was the royalty component that you attribute to that?

And then you also mentioned some price increases for Betaseron and Proleukin, as well as some wholesalers stocking impact. Could you quantify what the price increases were and what the wholesaler stocking was?

And then, finally, I'm curious to know how if you're starting the

pivotal study essentially in the fourth quarter, how is it that you think you can begin starting to recognize revenue as early as the end of '03?

Right. I will try to do it,

, but I may ask you for a repeat on some of them.

Let me start with the blood testing. The royalty that we recognized in the third quarter of the year was in the range of $13 million for the Roche blood screening royalty.

With regard to price increases for the products, most of the price increases I was making reference to were earlier in the year and my recollection in general is they're all in the range of five percent. I'm sure

, who's here, will correct me if I got that general comment wrong.

With regard to the inventory stocking, the story is quite different on the three different products. Proleukin is probably the most striking story and to be fair, most of that striking story was the result of last year - 'Q3 of 2001. You may or may not recall, but we in general during 2001 went through a process of destocking the wholesalers. Probably the largest single quarter impact was in Q3 where we dropped from roughly three months inventory in the channel to roughly a month-and-a-half. And so the reported sales in Q3 last year were very, very low. We didn't have anything like that swing in the third quarter of this year, and so when you compare year-over-year, it's a big factor and its one of the things that led to that big jump.

Betaseron was a much more modest effect

to be fair Betaseron story as we have described in prior quarters of this year is a little complicated, because you've got the new formulation, the room-temperature stable formulation causing kind of a de-stocking of the old product, and a restocking of the new product. I suspect some of that is still ongoing. And TOBI wasn't much of an effect, I think there was a--quite a bit of the stocking in this quarter, but it wasn't a major variable.

any of that you'd like to add to?

No, I was just going to say what you just said, TOBI was minor in terms of inventory, basically the real growth that you've seen in TOBI.

And Dennis, you got me, what was your third question again?

The third question was, the regulatory pathway for

, and given that you're starting what is a pivotal study in the fourth quarter, how is it that you can start recognizing commercial revenue as early as the end of '03?

I'll let Jack Goldstein handle that one.

Okay, let me see if I can give a brief explanation. First of all, there have already been frequent--what I call preclinical studies

in several European countries. The studies that are starting in the fourth quarter and the first quarter of '03 are additional studies in Europe that are specifically required for registration in several of those countries, and they are not very extensive studies that are required for many of those countries. Midyear, next year is when we are really first going to file an ID with our partner Gen-Probe, and really start significant large-scale clinical trials for US

, which will occur at the end of '03. So we are expecting some sales, in certain European countries where we will have registered the product in '03, toward the end of '03. Does that answer your question?

Yes, but I guess I'm puzzled, because the development for Procleix took so much longer, and there was a significant review time. Why do you think it will go so much faster with

? Is this a

pathway, or what is it that makes it so much faster?

This is Bill Green. The Procleix timeline and the

timeline are likely to be similar. They both are likely to take a good deal of time in the US, and they both took relatively little time outside the United States. We had Procleix sales outside the United States over a year and a half ago, and we didn't get to approval in the United States until this February. We expect the same sort of timelines to apply to

. You can offer these products for sale outside the United States on a much quicker timeline, with much shorter registration process, and in some countries, no registration process.

I would just add, this is Jack Goldstein again, there are no

s in Europe, and in many of these countries, it's simply a matter of doing some short studies, which we would even call marketing studies, and registering the product, and there's no--there's no regulatory body like the FDA to go through an extensive review like a

or a

.

Great, thanks.

The next question comes from

of SG Cowen.

Hi

.

Yeah, good afternoon, congrats again on a good quarter. My question is for Jim on Menjugate sales. I just wanted a clarification on what you said about the '02 sales trends. Did you say that we're on track for 50 percent of last year?

No, I said about 40 percent.

Forty percent.

And that's down, we had said 50 percent in our last call, we're now thinking numbers in the 40-percent range.

So that's still implying a pretty good, stronger than we've seen quarter in Q4 at least.

Yeah, and that's--that's why I mentioned the backlog of 24 million roughly, some of which may slip into next year, but most of it, we expect to ship the ...

And is it too early to give guidance on '03 Menjugate sales?

Yeah, I think it probably is, because I think that that is a process of both--yes, I think the Menjugate story--one of the nice things about Menjugate at this point in time is those sales in this quarter, or I suspect next quarter, are coming now from more reliable and more consistent sources. I think in the third quarter we shipped Menjugate to eight different countries and so what we're getting is sort of a consistent, rolling demand for the product. Obviously, we expect and the hope, in some sense, is that we will still get some of the large universal vaccination programs that you've seen in the past, but we also are happy to see that we're establishing a more stable flow of Menjugate sales.

So would we--would you expect some growth, at least, in '03 or, again, too early to say?

I think it's too early to give you a specific comment.

OK, thanks a lot.

Thank you.

The next question comes from Peter Ginsberg of Piper Jaffray.

Hi, Peter.

Hi, afternoon. Couple of things. First of all, on the Ortho joint business, I've had two quarters in a row of real strong growth. I was wondering what you think is driving that. Could it be competitive outlook with Abbot or--wondering if you can give me some detail on that and then I've got one more question, too.

Sure, I'll let Jack take the first one, OK?

Sure.

OK, what's driving the Ortho business is actually what's called their diagnostic--immunodiagnostics system called ECI and they have significantly higher sales of HCD into the diagnostic markets than they had previously.

And what's driving that? Is it a newer version or?

It's a fairly new random access immunodiagnostic instrument that is a lot easier to use and it fits much better into clinical diagnostic labs and it's now penetrating the market much better than others.

OK, alright.

I think in addition to that there are some timing issues associated with some inventory and some sales and it's also some price increase in there, as well.

OK, thanks. And then, switching gears to the flu vaccines, you mentioned six, seven million, so up 50 percent versus last year's third quarter, but that the full flu season would likely be up 25 percent. Roughly, in the past, how much of the flu season occurs in terms of third quarter sales versus fourth quarter sales.

Yes, unfortunately, it's a tough question to answer and the reason why is because, as you know, you're basically--we, everybody else in the industry--is shipping this product right during a single period of time. So one of the things that can ship it from Q3 to Q4 is really whether or not you got regulatory approval in a given country in the first week of October or the last week of September. This year we got some of those in the last week of September, were able to ship product, and so slip some of what was in Q4 and may have been in Q4 and in other prior years in Q3. It's one of the reasons why we wanted to provide you sort of a full picture. I mean, obviously, Q3 was great, up 50 plus percent, but I think, overall, the season is about a 25 percent growth.

Can you give us a sense then, Jim, Chiron's flu vaccine sales will be up 25 percent, roughly, for the flu season. How about the overall ex-U.S. market?

That I'm not sure I've got information on, Peter, one way or the other so I'm afraid I'm not going to be helpful for you on that one.

But you would think significant market share gains for Chiron, though?

That's what we anticipate based on being first to market and, basically, getting into some of the new markets that I described.

OK. Thanks a lot.

Your next question comes from Matt Geller, CIBC World Market.

Hi, guys, this is actually

at CIBC. First question, with the discontinuation of the various clinical trials, is this prompting you to aggressively seek any

opportunities to expand your product development portfolio and, if so, are you targeting therapeutic products, vaccines, or do you want to broaden your blood testing business?

And secondly, when can we expect to see data from the ongoing clinical studies of

in combination with

.

This is Sean Lance. Let me try and take the first part of that in terms of, you know, where it is we're gonna go. We continue -- and I've said this in the past, and we continue to say it, that we continue to stay vigilant on opportunities that come our way across our three business opportunities. We have in the past made acquisitions that have helped us with our strategy going forward in terms of BioPharma, and we continue to look for these opportunities as we go forward across the full capability of the organization.

OK. Thank you.

On the second part of the question, I thought I'd let

try to answer that one.

The question related to the current status of that program?

The current status, and when we can expect to see any data in any of the ongoing trials.

OK. Just by way of a brief background, we think the rational for using

in conjunction with anti-cancer

is strong, and that was born out by the phase one data -- both from the clinical standpoint in that we saw a dose response - qualitatively strong responses, and an apparent relationship between the clinical response and immune response measured by natural killer cells.

The program that Sean outlined in his remarks is designed to provide us information probably in the second half of next year, which would allow us to confirm the result we've seen in phase one, and have a variety of opportunities moving forward with respect to advancing either

, or the second generation product.

OK. So the potential for pivotal trials second half of '03 or beginning of '04.

That's the most likely scenario.

OK. That's helpful. Thanks.

Your next question comes from

, Banc of America Securities.

Hi, Mike. Mike?

Mike, your line is open, sir.

Hello, Mike.

Operator, perhaps we ought to skip Mike and come back to him later if he comes back in.

Yes, sir. Your next question comes from Thomas

of Deutsche Bank.

Hello. Can you hear me?

Yes, we can.

I had three questions. First of all, given the significant appreciation in the euro on a year-over-year basis, and your relatively high degree of European exposure on the vaccine side, can you give us what the year-over-year gross was in the third quarter vaccines business on a local currency basis? Secondly, for

, if you're planning to launch a large-scale clinical trial in the U.S. of the same length and size as the original Procleix trials, will you still be able to collect full commercial pricing in those centers that participate on the

and HIV part? And then lastly, with respect with the

technology, should we be expecting there to be a price premium associated with that above the initial commercial price that was negotiated in the second quarter? And what do you anticipate that time period for any sort of price period to be implemented? Thanks.

Let me see if I can direct the last two questions to Jack Goldstein or Bill Green, although, we may have to get a little clarification on the second one. Jack, why don't you get started on it?

OK. With regard to the trial on

, they will be done separately and distinctly from any testing that is done on blood units that are used for transfusion.

So, blood testing that is done on units for transfusion will be done using the current test -- the current FDA approved test -- and the trials on

will be totally separate and not used to report patient results. I think that answers your question.

In terms of

, we're expecting

to be phased in unit by unit. And there are five units that make up

, and there are five units that will be further automated. Two will be submitted in around the summer of '03, one in December of '03, one in August of '04, and one in March of '04. So, we'll be rolling these out as we get FDA approval, but in addition again in Europe and other unregulated countries where we just require a registration, these will be phased in in '03 and '04.

In terms of price premium, yes, we think we will get some price premium, although I don't think we'll get a huge price premium for introduction of these units. I think that the main basis for doing this and I think the main thing that we'll see is that it will help provide automation and efficiency of individual technicians to allow them to move towards smaller pools and individual donor testing which will have more of a major result on our financials.

Your first question which was to translate the vaccine sales in common currency, I don't think I can answer it directly,

, because you managed to ask a question we don't have an answer to in the room, but let me give you a couple of pieces of data. One is that our average euro exchange rate was about a 10 percent difference between Q3 '01 and Q3 '02. So that probably gives you some sense of what the impact is of currency versus other things.

I think probably the most important element to remember and I think you know this is that from a bottom line perspective, the impact of currency changes is relatively muted because while we have substantial revenues coming in non-U.S. currencies, we also have substantial expenses coming in non-U.S. currencies. And so to that extent, our vaccines businesses, to a substantial extent, self-hedge.

Did we manage to cover everything?

Yes, I think so. I actually just a follow-up on the answer to the

clinical trial, I guess I'm not quite clear here. I'm just trying to get at whether or not the trial for

would eat away into your sales of Procleix either by stealing away transfusions that would otherwise be done on Procleix or stealing away centers. I just wasn't clear from the answer.

No, not at all. As I tried to explain, the

clinical trial is just going to be a clinical trial. It's not going to be - it's not going to be product that's sold, it's simply going to be an FDA clinical trial. All of the centers and all the blood that's used for transfusion will be continued to be tested on the approved product - the duplex, for which they will pay for.

So, what are you using as the blood for the

clinical trial then?

Used blood after it's tested on the approved product.

I see. Thank you very much. That was exactly what I was looking for.

Your next question comes from

with Banc of America.

Hi. Good afternoon.

Good afternoon.

Just a couple of quick questions - first of all, just remind us the regulatory status of Menjugate here in the U.S. Secondly, wanted to get a little more information on the status of single-donor versus here in the US, and then finally, wanted to see if you had, or one of you care to comment on the speculation the popular press has been making about your bid for

. Thanks.

Sure, with regard to

in the United States press, I can get Sean to answer that question for you.

Yeah, we affirm--you know, we, in this discussion with the regulatory authorities on what we can do as you know, that there's been a great deal of use of this product external to the United States, and there's a tremendous database, and we also are very sort of hopeful that we can get an approval in the United States, but we need to know what the sort of requirements are, and we are right at this moment in discussion with them.

Are those requirements just for, I guess additional

in the safety database here in the US?

No, we just--we've just been in discussion to find out what is required.

Okay.

I'll take the last one, which is the question about the speculation on

. I'll tell you upfront that our answer will be no comment. That is always our answer with regards to questions on specific transactions, we don't confirm, we don't deny, the answer is no comment. In general, obviously as Sean mentioned before, we have grown the Company through M&A, and we have expressed our intent to continue to be vigilant looking at new opportunities, but with regards to any specific deal of any type, the answer is no comment.

Okay, and I ...

I think the third question was on single-donor testing, and I'm going to turn that one over to Jack, if I could.

Okay, with regard to single-donor testing, there are certain countries and certain sites that are doing single-donor testing today. For example, Italy is doing single-donor testing; there was some single-donor testing done in some individual centers in France, and there was some single-donor testing done in some individual centers in the United States today. As

was a meeting of the Blood Products Advisory Committee in Washington last month, and single-donor testing was a--one of the major topics that were discussed--that was discussed there, and I think that everybody agrees that single-donor testing is the way that the market will go eventually, and some of the things that are holding the markets back would be appropriate automation in order to support single-donor testing in very, very large centers. So at centers doing the single-donor testing, we are supporting them, and also we believe that the modifications that we're making to

will make it a lot easier for centers to got to single-donor testing as we move forward. So we think it's rolling out in certain individual centers, but I think it will roll out to all centers probably as we get approval for

in the US and as we implement

in countries outside the United States that I called unregulated before, but what I meant was not that they are totally unregulated, but they simply have a registration process, and the regulations are not as stringent as they are here in the United States.

Operator, since we're coming up to our one-hour deadline, let's take two more questions, and then let's cut it off at that point.

Okay sir, and your next question comes from

.

Hi

.

Hi, actually, this is

, hi. I have two questions, the first is, I know you mentioned where the four--the four clinical trials, if you could just recap the

plus the

trials, that are ongoing, when do you expect to--when do you expect to see some data? And then the second question is on the manufacturing of Betaseron. How will that--will that in any way change your P&L at all in terms of how it's recorded?

Let me let

ask--take the first question, which is updating on the

trial data.

There are two trials with--two Phase II trials--there's

and

in patients with non-Hodgkins lymphoma. We're just at the early stages of enrolling so we can't forecast precisely, but our best projection would be that we would have information from those in the second half of next year.

OK.

And on the question of the manufacturing impact, let me let Craig Wheeler take that one.

Sure, that's a quick one. We will be taking over the manufacturing, but we do not anticipate any affect on our C&L.

OK, thank you.

Great. Operator, we'll take our last question.

The last question comes from

with SG Cowen.

Hi, good afternoon. I'm curious, can you give us a sense as to what you think your penetration is in the United States with Procleix and I don't know if you can comment as to what percentage of your sales are coming from ex-U.S. for that product.

With regards to the market share in the United States, it's 70 plus percent for us versus Roesche in the U.S. marketplace. We have been, during the trial process, in the range of 70 percent. We talked about that before, but we've also seen a trend towards conversion of new customers to us post-approval since we have the only approved product on the market and that's been a positive effect. Of the total NAT sales, how much is in the United States? I believe the number--Jack, do you know the number--I think it's in the range--yes, I think it's in the range of the total it's about 80 percent, 70 percent, 70-something in that range. I think it's about 27 of the total 30-plus, 36 that we reported.

OK, and then switching over to Betaseron you mentioned there was some restocking for the room temperature and de-stocking of the old. Can you just give us a sense of both of them? The magnitude there?

Most of that occurred in prior quarters and so the question was

answering that question in the context of comparisons over time and those things affected prior quarters more heavily than they affected the current quarter. .1, .2, I'm not sure we can actually quantitate it for you at the level that you're asking because it's, you know, would be a lot of judgment calls associated with it. Craig, do you want to expand on ...

Yes, I think the only comment I'd make on Betaseron is we're actually seeing real demand growth for Betaseron in conjunction with the growth in the marketplace and we're attributing that, basically, to the fact that we are seeing uptake of our room temperature formulation, which is actually going quite well for us, as well as we're seeing consistent clinical data with Rebif in terms of the affect of the higher dose--higher dose regimens is actually playing out quite well for us. So we're quite pleased to see that growth line increasing.

But overall net for this quarter, was there some stocking going on?

There was a little bit of effectively de-stocking going on as a result of the having acquired a little too much product in prior quarters.

OK. And then finally, you mentioned a 25 percent year-over-year guidance for the flu vaccine in Europe. Can you give us a sense of whether there's any price increases planned as a part of that?

It's a complicated question because we have three products on the market and they're priced differently and so we probably have a de-facto price increase as a function of mix, but I'm not sure I can quantitate it for you.

OK, thanks very much.

Not at all.

Great. Operator, we're wrapped up with questions.

That concludes the question and answer session and I would like to turn the call back over to Sean for some closing remarks.

Thanks, Joyce. I want to re-emphasize Chiron's proven ability to deliver strong financial results. During a difficult market is testament to the value of our diverse business model. In the third quarter we saw a strong revenue and product sales growth, while at the same time we made progress towards voting franchises for future growth. So let me recap. Product sales grew substantially, increasing 27 percent over the same period last year. It was a strong year-over-year growth from both

and

.

Blood testing saw its best quarter ever, as commercial pricing for Procleix took effect, and vaccines performed well with flu vaccine sales especially strong in the third quarter.

Now, Chiron has delivered on its commitment to a long-range average annual growth rate of 25 percent. Looking towards the next two to four years, we are revising our earnings growth goal to 20 percent, as top line revenue growth increases, and investment and maturing development programs increases.

Some years, results may be higher or lower than the average growth rate. We are, of course, committed to delivering on this goal with the reliability and consistency that are the hallmarks of our past performance.

Now, we are confident about Chiron's performance and future, and I want to thank all of our shareholders for taking the time to listen to our call and staying invested with us. Thank you.

Thank you.

Thank you, operator.

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