Novartis AG (NVS) 2002 Q4 法說會逐字稿

Good afternoon.

My name is Tina and I will be your conference facilitator.

I would like to welcome everyone to the Chiron fourth quarter 2002 financial results conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer session.

If you would like to ask a question during this time, simply press and then the number 1 on your telephone keypad.

To withdraw the question, press and the number 2.

Now, over to Mr. Martin Forest, Senior director Corporate Communications and Investor Relations.

Please go ahead, Sir.

Good afternoon welcome to Chiron’s Fourth Quarter 2002 and year-end conference call.

On behalf of the Chiron team I would like to introduce our principal speakers, Jim Sulat, Chiron’s Vice President and CFO, and David Smith, Vice President of Finance.

I will be available after the call today with the Investor Relations team to answer questions you might have.

Before turning over to Jim for discussion of results, our remarks today will contain forward-looking statements relating to future events of the financial results of the company.

Actual events and performance may differ materially from our expectations.

We will refer you to documents filed with the Securities and Exchange Commission, including 2001 10-K and 2002 third quarter 10-Q report.

The 2002 10-K report will be available shortly.

All of the filings include information under the heading "Factors that may affect future results. in the MD&A [ph] portion of the document"

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

Please note that where we indicate a number to be pro forma in today's release, we made available a summary reconciliation in the pro forma to GAAP and the condensed, consolidated statement of operations attached to our press release issued today.

Consistent SEC regulation, we do not undertake obligation to update forward-looking information we are giving today.

Please note that this call is being recorded.

This is copyrighted by Chiron.

No retransmissions or copies of this conference call can be made without the written permission of Chiron.

With that, as a preface, I’ll turn it over to you, Jim.

Thanks.

Good afternoon, everybody.

Today Chiron announced its fourth quarter and year-end results.

Chiron had a good quarter and excellent year.

As you will recall in the third quarter of 2002, we raised guidance to 1.25 to 1.30., pro forma earnings per share.

Our full-year results came in near the top of the range at $1.29, 34% increase over EPS in 2001.

Pro forma EPS for the fourth quarter was 33 cents, up 27% from last year.

Each of the three business units contributed to strong results for the quarter and the year.

Total revenue for the year was $1.3 billion, compared to 1.1 billion in 2001.

Increase of approximately 14%.

Total product sales were 914 million, compared to 772 million in 2001, 18% increase.

Growth continues to accelerate, as [inaudible] grows in market share and geographic reach.

Pharma performed well strong annual growth for TOBI with Betaseron.

Results for the vaccine business is good.

Due to growing sales of flu, pediatric and travel vaccines.

Chiron strong performance in 2002 coupled with the success in meeting our goals and advancing our clinical program leaves us well positioned for progress in 2003.

Chiron for long-term revenue growth with each of the business units contributing to that objective.

Those who heard the company's presentations this month know, we are providing investors with a detailed roadmap of plans for growth and how we will meet the goals to help you better understand the long-term value.

I would like to comment about the performance of each of the business units and how each will help drive growth over the next several years.

David Smith will follow me to provide detail of financial results.

I will begin with biopharmaceutical business.

This business showed growth in 2002.

Revenues, including Betaseron oil [ph] were 21% higher in 2002, compared to 2001.

All major products contributed to the strong increase.

Total sales continue to grow, up 19% year-over-year.

Primarily driven by success of the products commercial ramp-up in Europe.

TOBI has been a success story for Chiron.

Because of therapeutic benefits widely raised by the community of the gold standard in the treatment of pseudomonal lung infection.

Increased compliance and greater carton utilization across patient segments will help fuel growth even further.

TOBI also continues to grow on strong clinical method.

We are preparing to submit data from the trial in mild and moderate segments of the CF population for the European conference for CF to be held in Belfast in June.

Positive data about TOBI’s effectiveness in the pediatric segment have been published in the American Journal of Respiratory Critical Care Medicine.

Such studies spread clinical awareness in the treatment of pseudomonal lung infection.

We are making significant investment in the future of Chiron’s inhaled antibiotic franchise and believe the franchise will be important in Chiron's growth.

We are working on different approaches to drive growth over mid-term and long-term.

TOBI2X, a concentrated formulation will reduce administration time by about 50%, is complete with Phase I testing.

The dry powder formulation of TOBI in a hand held device is expected to exit the clinic this year.

The development of products will increase ease of use and convenience for patients to create new opportunities for the franchise, as well expanded indications.

We expect data from the phase II open label trial forTOBI for [inaudible] and will be presented in May at the meeting of the American Thoracic Society in Seattle.

The current phase II trial for bronchiastrics [ph] continues to enroll patients.

In the multiple sclerosis area, Betaseron continue to distinguish itself by its strong clinical message treatment as MS treatment.

Clinical trials showed Betaseron was more effective an Avanex at one and two years and the evidence study corroborated the importance of higher and more frequent doses.

For 2002 Betaseron sales, including Betaferon royalties rose 22%, a strong showing given the competitive nature of the market.

We have seen excellence response to the luke temperature [ph]formulation of Betaseron, which was introduced last year.

As the only approved room temperature formulation in the US, Betaseron brings an additional convenience to patients.

The introduction of a diliant [ph]syringe in the second half of 2003 in the United States and Japan will increase ease of use.

Betaseron sales have been bolstered by opening of beta centers last year by Chiron's marketing partner, Berlex.

It stands for Betaseron, training, education and assistance and all together Berlex plans to open 20-such centers.

The centers provide consultation with dedicated nurses and other MS care providers, education for patients and their caregivers and comprehensive training about medication.

The global MS market has significant room for growth.

Our partner, Schering AG estimates that 40% of US patients diagnosed with [inaudible] or secondary MS receive no treatment.

In the EU, the estimate is 60%.

A number of studies are underway to build on Betaseron a strong clinical foundation.

Berlex and its parent Schering AG are conducting several studies, including the Benefit and Beyond studies to establish value of early treatment and high-dose therapy for Betaseron.

The independent Uphims [ph] trial conducted by the Italian MS Society will study effect of higher dose Betaseron in patients who with inadequate response to the standard dose of Betaseron.

We will move to the oncology franchise.

[inaudible] Sales grew 22% in 2002, compared to 2001, largely because of lower volume of 2001 sales, due to inventory management by Chiron that year.

Allowing for this, 2002 sales were essentially level to those in the previous year.

Chiron has more than a decade's worth of experience with the value of Proleukin [ph] as new system modulator and we are leveraging that experience to study its ability to improve standard of care. for [inaudible].

The company has four clinical trials underway to study prolucins [ph] potential in combination therapy.

These include first Phase II trial of Proleukin and Rituxan is currently enrolling patient with low-grade non-Hodgkin's lymphoma who failed Rituxan therapy.

Second, the Phase II trial of Proleukinand Rituxan is currently enrolling patients with high grade lymphoma who failed prior chemotherapy and/or Rituxan therapy.

Third, a Phase I study with patients with advanced non-Hodgkin's lymphoma, using Rituxan in combination with liquid IL-2 a new formulation designed for subcutaneous administration and is anticipated to be more convenient and better tolerated.

A Phase I study of liquid IL-2 was given patients with metastatic breast cancer.

The robust nature of the program underscores current belief that Proleukin has significant potential when combined with [inaudible] antibodies.

The NHL and breast cancer markets are sizable.

We project they will grow to more than 3 billion each by 2010.

Rituxan in particular has emerged in standard therapy for majority of NHL cases For [inaudible], medication should not (inaudible).

We are excited about the potential of Proleukin to improve these therapies and the outcome for patients.

The success of this program could be a long-term driver of growth for Chiron and we hope to have preliminary data from the Phase II trials by year's end.

We are making progress on Phase II clinical trials for tezacitabine, one of several cancer therapies we are developing.

We are (inaudible) flights are open for patient accrual in the colorectal trials.

We will study the compounds safety and efficacy of the second line therapy in these indications.

GFKI, the first small molecule to come out of the company's cancer discovery program is completely in pre-clinical development.

We intend to make a decision about an IND file for GFKI this year.

Let me move to our vaccine business.

Sales of vaccines were 357 million for 2002, slight drop from 2001 sales of 365 million.

In 2001 we saw large shipment of Menjugate.

Quebec [ph] as part of a universal vaccination campaign there, where Menjugate sales in 2002 were at more regularized levels.

Importantly, though, vaccine sales other than Menjugate experienced a 17% increase compared to 2001.

Particularly impressive was the performance flu [ph] vaccines an importance franchise for Chiron, was 90 million of sales for 2002.

We said last quarter sales for entire flu season would be up 25% from the 2001 season.

Sales for fourth quarter were stronger than we anticipated and the franchise saw 30% increase over the 2001 flu season.

Flu vaccines are an important and cost-effective way of saving thousands of at risk individuals each year.

The CVC reported earlier this month that annual deaths from flu surpassed deaths from HIV.

Increasing recognition of the value of flu vaccines has increased demand.

Chiron is second largest player in the flu market outside of the United States.

We expect to capitalize on our strength in this area.

CVC recommends flu vaccines for individuals 50 and older.

We believe the market and other countries could expand as health authorities adopt its standard and lower the age for recommended vaccination.

As part of Chiron’s plan for future growth, we are investing in self-culture system to allow us to increase output and flexibility because we believe we can sell more flu vaccines than we currently make.

Phase I testing of our self cultured derived vaccine is underway.

As I mentioned, Menjugate sales in 2002 reflected sustained level for routine vaccination.

We are prepared to compete for tender offers as they arise and were recently awarded a share of one such offer from state government in Australia.

We are building on Chiron expertise in Menjugate to develop vaccines against all five virotypes that cause bacterial meningitis.

Current polysaccharides vaccines have limitations They are not effective in children under 2 years of age and they don’t confer in neurologic memory.

We have deep and robust meningococcal pipeline and are making good progress in moving these programs to the clinic.

The combination ACYW vaccine began Phase I testing last fall.

We expect data from this trial in 2003.

Chiron’s [inaudible] for New Zealand has entered Phase II.

The company's first generation genomic based MG vaccine can provide broad coverage against all strains of MG and is in Phase I. We also expect to see data from this trial in 2003.

Currently no broad coverage Mendi-vaccine exists.

We believe that such a vaccine would have block-buster potential with irrelevant catch up population of 150 million people or more.

In addition to our meningococcal program, we are looking for advances in HIV and HCV vaccine program.

We expect both HIV and HCV candidates developed in collaboration with NIH will enter the clinic this year.

Also a second HCV candidate developed in collaboration with ESL Limited, has completed Phase I enrollment.

I think you can see the breadth and potential of our vaccine pipeline reinforces our belief that vaccine business has potential to be a major driver of long-term growth for Chiron.

With relation to Blood Testing, we had another record quarter. as the [inaudible] HIV-1HCV system continues to perform well with current customers and grow with new customers and new markets.

For clinics, product sales for 2002 were 125 million, 159% increase over 2001.

Blood Testing has been a major driver of revenue. (inaudible) approaches first anniversary of approval by FDA, we receive multiple opportunities (inaudible).

You will recall Chiron originally estimated in target markets for nucleic acid testing, 50 million blood donations are collected annually representing a potential market of 500 million plus.

However, as NAT becomes the gold standard for blood safety the potential market is expanded.

With Latin American and Asian countries such as Brazil, India and China representing about another 20 million additional units of blood tested annually, bringing total addressable market number 70 million donations per year. (inaudible) is continuing to move into new geographies with sales beginning recently in Poland and Belgium.

Launches indicate we are making significant end roads in European market. (inaudible) our market visibility in Europe Chiron opened a [inaudible] training in France for a national blood transfusion institute. this multi-lingual center provides training for all of Chiron’s European and Middle Eastern customers, as well as offering educational seminars.

In addition to expanding our regional reach, we are continuing to add to our US base of customers.

Chiron launched three new major new customers in the United States, after Roche received approval for nucleic acid test at the end of last year.

Chiron and collaborator Gen-Probe are also expanding their leadership in blood safety by developing new [inaudible] to screen for transfusion transmitted pathogens.

This year we expect to see rapid progress toward commercialization for the Procleix (inaudible) which has hepatitis B (inaudible) to the current (inaudible) for HIV and HCV.

Chiron expects that the IND for Procleixultria [ph] will be filed in the United States in the second half of the year.

And a registration study to obtain TD [ph] marking is underway in Europe.

We expect to see approval for Procleixultria [ph] in some countries by the end of the year.

Chiron is planning market evaluation for its Procleixultria with several European countries to determine how it will be used in testing environments and data from those evaluations are expected to be presented at the ISDT meeting in Istanbul in May.

With Genprobe, Chiron is also developing a West Nile assay.

That would run on the current Procleixinstrumentation platform.

We expect the assay will be available for use under IND in time for the mosquito season this summer.

The ability to identify a blood-borne pathogen and develop an entirely new assay in less than a year is hallmark of the dedication of the two companies for blood safety and a testament to the speed with which Chiron and Genprobe can bring new products to market.

Finally, as customers move toward individual donor testing, Chiron remains committed to supporting the market by improving Chiron’s eSAS system.

We have five upgrades planned for eSAS that will help increase the ease of use for blood centers we’ll begin filing 510-K applications on enrollment basis starting in the second half of 2003 and finishing next year.

As you can see, it has been a strong year for Chiron and the coming year holds promise for important advancements in many parts of the company.

We look forward to delivering on this promise as 2003 unfolds.

Let me turn the call over to David to discuss our financial results.

I will review results for the quarter and full year which were released today at approximately 1 p.m. pacific standard time.

All earnings per share announced today refer to pro forma diluted per share earnings.

As we have discussed previously, we present financial results on both as reported and GAAP basis and pro forma basis.

The adjustments we made this year to arrive at pro forma earnings consisted of write-off of purchase technology related to Matrix acquisition the amortization expense on acquired, identifiable and tangible assets related to the pathogenesis acquisition the Chiron bearing [ph] acquisition and discontinued operations associated with the sale of our Diagnostic business.

The adjustments in 2001 consisted of the amortization expense on goodwill and acquired identifiable intangible assets related to patheGenesis acquisition.

Discontinued operations associated with the sale of our Diagnostics and visions businesses and 20 million of up-front royalty and license fee revenues from Roche in the first quarter related to past HIV diagnostic product sales.

For the year, Chiron reported pro forma income for continuing operations of $248 million dollars or $1.29 per share.

This result is at the high end of our revised guidance and was approximately 34% higher than the earnings per share of 96 cents reported in 2001.

For the fourth quarter, Chiron reported a pro forma income for continuing authorizations of 33 cents per share.

Total revenues for 2002 increased 14% to 1.3 billion from 1.1 billion for 2001.

Product revenues increased 18% to 914 million from 772 million.

Increases in sales were seen in Proleukin, TOBI, Betaseron, flu, travel vaccines, pediatric vaccines and Procleix.

As expected, and as discussed, Menjugate sales were lower than 2001.

Excluding the impact of Menjugate in both years product sales grew 29%.

Equity and earnings was up primarily due to strong joint business profits.

Collaborative agreement revenues increased as expected to the Novartis-related revenues which ceased at end of 2001.

Royalty and license fees increased 12%, primarily due to HIV and HVC product royalties from intellectual property portfolio.

Other revenues decreased due to timing of contract manufacturing activities.

Gross margins decreased to 63% from last year's gross margin of 64%.

Research and development expenses for 2002 totaled 326 million, down 5% from 2001.

The overall decrease, while somewhat unexpected, was primarily due to (inaudible) as trial concluded in fourth quarter of 2001, this was partially offset by increases for the development of TOBI, tezacitabine, Proleukin in combination with monochromo antibodies and our meningococcal franchise.

The timing of R&D expenditures will fluctuate from period to period depending upon the timing and the nature of our development activities.

SG&A expenses for 2002 totaled 284 million, up 12% from 2001.

Increases in SG&A were due to support for continued market penetration of TOBI in Europe, as well as commercialization of Procleix and increased marketing and investment in all of our businesses.

These expenditures, while higher than expected, are in line with the increased level of sales seen during the year and reflect our commitment to long-term growth.

Our full-year effective tax rate was 27%.

I would like to move to review of the business units financial results starting with biopharmaceuticals unit.

Biopharmaceuticals product revenues, including Betaseron royalties were 456 million in 2002, up from 377 million in 2001, a 21% increase.

We saw increases in TOBI, Proleukin and Betaseron sales.

TOBI sales were 147 million, up 19% from 2001, due to progress of the TOBI launch across Europe and increased patient demand and compliance in the US and price increases. 2002 sales of Betaseron, including royalty earned from sale of Betaferon by Schering in Europe were 165 million, versus 135 million last year, an increase of 22%.

This increase was driven by increased patient demand, price increases, wholesale ordering patterns and as noted in prior quarters, one-time benefit due to catch-up related to our non-US Betaseron [inaudible] sales and Betaseron royalties.

We continue to be pleased by the growth achieved by Betaseron worldwide.

The first three quarters of the year our partner, Schering reported strong worldwide growth in the mid double digits.

The picture for the MS market is still somewhat complex, but we believe the benefit to MS patients for more frequent and higher dosing such as with the case of Betaseron, is being born out in the marketplace.

Sales of Proleukin were 114 million, up 22% from 2001, due to wholesale ordering patterns and pricing increases. the serum inventory levels remain in line with our expectations.

Gross margins in the biopharmaceutical segment increased to 73% from last year's gross margins of 71%, this increase was primarily a result of product mix, biopharmaceutical product sales and price increases taking earlier this year.

Turning now to vaccine.

In 2002, total product revenues for vaccine business were $357 million versus $365 million last year.

We saw increases in flu, travel and pediatric vaccines, offset by decrease in Menjugate.

As we have discussed throughout the year, we expected Menjugate sales to be about 40% to 50% of 2001.

In 2002, sales were $55 million, compared to $106 million in 2001.

Notably in the fourth quarter 2002, we had sales to the private market in Australia, which reflects success of continued pursuit of additional worldwide opportunities for this product.

Sales of flu vaccines were $90 million this 2002, up 21% from 2001.

Sales of our flu vaccines in third and fourth quarter, in the flu season, were up 30%.

Increase in flu vaccine sales was primarily the result of being first to market in Germany.

Sales to new countries like China and increased sale to existing markets such as Germany, South Korea, UK, Spain, Ireland and Italy, due to increased awareness in the overall flu vaccines market.

Sales of travel vaccines, comprising TBE and Rabies were $64 million in 2002, up 24% from 2001.

The TVE vaccine was the principal growth driver as it had a successful year in the German market.

Sales of pediatric vaccines were $148 million in 2002, up 11% from 2001, primarily due to increased polio sales to not-for-profit agencies and developing markets such as India.

Gross profit for vaccines was 58% down from 63% in 2001.

As noted previously, this was a result of additional product revenue, product reserves in first and second quarters of 2002, due to various issues, including seasonality patterns, excess and obsolete inventory and production yields.

In addition, last year's gross margin represented benefit of heavily weighted average of Menjugate higher gross margin in product mix.

Moving to third business, Blood Testing.

Blood Testing total revenues, including product sales, equity in Ortho-Joint business, collaborative agreement revenues and royalty and license fees increased to $316 million in 2002, from $185 million a year ago, 71% increase.

This increase was primarily due to the approval of Procleix earlier in the year and a subsequent move to commercial pricing as well as increased equity and earnings due to strong joint business profits and higher royalty revenue for use of HCV and HIV intellectual property in blood screening diagnostics.

Product revenues recognized in 2002, include commercial pricing starting late in second quarter, additional market penetration in the United States for Procleix, as well as continued expansion in several markets abroad.

Procleix will continue to drive substantial growth in this business unit and for Chiron.

In summary, let me take a moment to highlight our view of 2002, and what to look forward to in 2003. 2002 was an exciting year for the company, one where we met and exceeded goals we set at the beginning of the year.

We achieved FDA approval for Prolcleix and made a move to commercial pricing in the US during the second quarter of 2002.

This important event contributed to the growth of our Blood Testing business and will continue to drive growth for this business unit and for Chiron.

We met our goal of 10 pipeline advances, along with the initiation of two Phase II clinical trials in non-Hodgkin's lymphoma with Proleukin and Rituxan and the initiation of clinical trial activity in our Meningococcal [ph] franchise for Men B and our combination vaccine candidate Men ACYW.

We completed the acquisition of Matrix Corporation and its nucleoside [ph] analogdatacytobine [ph] This serves to strengthen our presence in cancer and leverages our oncology marketing and sales expertise.

We've discussed our diverse business model and our ability to generate financial results with you in the past.

This year was no exception.

This model has continued to display strength and reliability.

In addition to operational advances, revenues and product sales were up substantially with total revenues up 14% and product sales up 18%.

Operating expenses overall were in line with our expectations and reflect ongoing commitment to grow the business over the long term.

We did not sacrifice long-term growth by having short-term focus.

Operating margins were strong with overall contribution from all businesses and earnings per share grew 34% over the prior year, well ahead of our initial guidance.

It is important to note the quality of our earnings this year was very high.

Again, in 2003, we challenged ourselves with robust set of goals that we will measure ourselves by and we expect no less from you.

We expect this to be another year of growth for the company. 2002 marked a year with Chiron made significant operational advances while delivering compelling financial results.

Our investment pieces of multiple sources of revenue and focus in cancer and infectious disease continues to present a business model that is attractive and poised to drive shareholder value over the long term.

At this point, I would like to turn the call back over to Martin.

Thanks.

That concludes our prepared remarks, now I will open up for questions.

We are joined by Craig Wheeler, president of Chiron biopharmaceutical, Bruce Arschmidt, vice president of clinical development Andrew Heaton, vice president and chief of operations for Chiron Blood Testing and Bill Green, our General Counsel.

Joining us on the phone is Jack Goldstein, president of testing and Joyce Moderhan, vice president of corporate communications and business development.

As always, the Investor Relations team will be available to answer further questions.

At this time, I would like to remind everyone in order to ask a question, please press 1 on your telephone keypad.

We will pause to compile the Q and A roster.

Your next question comes from the line of Dennis Harp with Deutsche Bank.

Congratulations on a strong finish to 2002.

My question is on the blood testing business.

You mentioned 50 million blood donations in the industrialized world.

What percent of that 50 million donation has converted to either the Roche system or the Chiron system?

How much of that market remains to be adopted?

Dennis, I may turn that over to Jack Goldstein, who is on the phone.

Jack, could you try to respond to Dennis is this

Jack: Can you hear me?

Yes, we can.

In the United States and Canada close to 100% of all blood is tested.

In Europe and Asia in the industrialized countries, about 80% of blood is being tested for at least HCV and in most cases HCV and HIV, using the NAT test.

About 20% of the market is still homebrew in those territories.

Okay.

So, when you say 80% of Europe, is -- they are using NAT, but 20% of the 80% is homebrew?

That is correct.

As you look at these other market opportunities, Brazil, India, China, where are they in their evaluations and how are they evaluating the Chiron system versus the Roche system?

In Brazil, a tender was just opened.

The tenders were answered and so they have actually mandated that NAT testing will begin sometime probably toward the end of this year.

In China, there is testing going on and we are participating in multi-center trial starting in the first quarter of this year.

We are currently in trials in South Korea and in Thailand.

Additional studies will be started up in Taiwan and Malaysia this year, as well.

Those are obvious countries where testing will begin sometime this year.

Okay.

One final question on blood testing.

That is with the West Nile virus and Ultrio under INDs, can you recover costs under those INDs?

And in which cases can you actually have commercial pricing under an IND?

The Ultrio trial will be under IND.

There will be no cost recovery.

It will be normal clinical trial.

We expect West Nile virus as Jim said, to begin sometime in the summer of this year and again, we expect that to be under cost recovery program with the FDA.

So, there we can recover costs as we move forward.

Thanks.

I will let others ask questions at this point.

Yes, your next question comes from the line of Eric Schmidt with SG Cowen.

As a follow along to Dennis's questions about NAT adoption, it seems like you had a good quarter for sequential growth on your product sales line, my guess is a lot is coming from the continued commercial adoption and I am wondering where we are in the US as far as that adoption cycle goes?

Is most of the contracts under commercial pricing or still got a ways to go looking forward?

All of our contracts in the US are under commercial pricing.

They have been as of the third quarter of 2002.

So, obviously we will enjoy commercial pricing for all of 2003.

In addition, we have gained significant share in the second half of 2002, and the beginning of 2003 in the US, as well as quite a number of other countries.

So, share gains rather than volume driving top-line growth at this point?

Volume rather than pricing driving top line growth?

In terms of sequential quarters that is right, it was in place at the third quarter.

I think and you should note that there are however, substantial growth outside of the United States, as well, Eric, and that is obviously both basically a penetration process.

Jim, one last question, you mentioned the secondary progressive MS market as a potential growth opportunity for Betaseron.

I know at one point your partner Berlex had and active SBLA filing with FDA, is there update on that front?

Over to Craig Wheeler, head of biopharmaceuticals is here.

Thanks.

We are still in discussion with our partner Schering with the FDA on the filing.

We are anticipating results hopefully soon, but we’re still in discussion with FDA .

Thank you.

Our next question comes from Caroline Cookthorn with Morgan Stanley.

Thank you.

First thing on Proliferon [ph] Betaseron, I think most of the comments you gave about the drivers of the growth were for full year.

I don't know if you could talk about the inventory pricing and volume gains for the fourth quarter specifically?

Yeah, David, maybe I can turn that question over to you.

We will talk about Q4 '02 versus '01, if that is okay.

Or sequentially with regard to inventory of pricing.

I am curious if those had contribution.

If you look at Proleukin Q4 over Q4, really the uptick there is related to price increase we took in early 2002.

And in terms of TOBI, we've seen increases on year-over-year basis related to obviously increased European activity, continued growth in the US which was outlined and also a price increase related to 2002, early in 2002.

Betaseron, there is a lot of demand growth there.

And minor bit of FX.

Relative to 3Q?

Relative to 3Q, little bit of Proleukin and wholesale ordering patterns and expectation of a price increase that occurred in Q3.

Something of the same thing for TOBI, offsetting that was our continued increase in European activity related to that.

And you can say for beta, looking more like wholesale ordering patterns on a sequential quarter basis.

Fourth quarter versus third quarter there was a step up on inventories for Betaseron and Proleukin, is that what I am to understand?

No, step down from Proleukin.

And Betaseron a slight step up.

Okay.

Then, second question, you mentioned some of the new Menjugate products like Men D product and add ons.

Is it possible to review what the incremental opportunities are there for the products and also curious about the size of the Australian contract?

Let's see.

The opportunity in the Men D area is enormous.

I think I mentioned catch-up population of 150 million people or more.

This will be a blockbuster product if the product comes to market.

I am talking about a broad coverage Men D vaccine.

We also have narrow coverage Men D vaccine, specifically New Zealand trial, single country only product.

It will have modest economic FX, it will be important scientifically in terms of proving the concept for purposes of developing Men D vaccine.

In terms of the size of the Australian contract in the fourth quarter, I don't remember.

I think it in the range of $5 to $10 million, but that is from memory.

Run through in current sales we have seen?

Sales in the fourth quarter in the private market and then we also participated in tender and that will show up in sales in early '03.

So, do you know the current backlog on existing contracts?

Current backlog at the end of the year was about 6 million dollars .

Okay.

Put more perspective on the new Menjugate products.

Is there a way to sort of run through a timeline for those incremental opportunities for the New Zealand-specific is minor versus if you did start to see a broader targeting vaccine what kind of time frame we might see that?

I will turn the discussion of clinical pipeline in the meningococcal over to Bruce Arschmidt, head of development.

Okay

I think the question pertaining to timing and the nature of the events and what they would be.

Broadly applications vaccine against various meningococcal B subtypes, as Jim said, would be a substantial opportunity and success in development, we could see that in sort of 2006 or 2007 timeframe.

The ACYW tezacitabine vaccine has same advantages over the first generation polysaccharide as meningo did over its predecessor monovalin [ph].

That is it is effective in ages 2 and under and produces immunologic memory and prolonged protection in older age groups.

It would be a significant advance with potential to be a routine childhood vaccine, which would be strategically quite important for Chiron.

I think the final thing I would mention, both programs are in Phase I. So, it is difficult to make any sort of accurate conception regarding time to market.

Okay.

Thank you very much.

Your next question comes from the line of Elise Wang with Salomon Smith Barney.

Hi.

Wondering if you could clarify, I recall from having looked at your 10-Q and comments you made previously with Betaseron and Betaferon franchise, they were a couple of things that would be happening.

One, you would change the way you accounted for sales of Betaferon to Schering to reflect actual sales versus accrued.

Second thing was as of the fourth quarter of last year, you were going to begin to supply Betaferon to Schering for the majority of European markets and would do shifting of revenues in product sales versus royalties.

I want to understand how some of that might be reflected in the numbers you just reported and what we can see going forward.

Good.

We will take a shot at it.

If we don't get it right, let us know.

With regard to the issue of manufacturing of the product, that is a shift that basically hasn't had much effect on financial results yet.

What will happen is during the course of 2003 and 2004, we will take over worldwide manufacturing for Betaseron and Betaferon.

To date, as you know, most of the non-US sales have been manufactured by Beradher-Engleheim [ph].

That process has not really kicked off and that will start to transition in '03 and will continue through '04.

The effect on our financial statements will be to have our product reported product sales revenues increase as we take over manufacturing and sell the product directly to Schering AG and have our royalties decline because we earn royalties on sales Schering AG makes of product made by BI.

You haven't seen much yet and will see it over the course of the next few years.

Impact on bottom line will be minimal.

In terms of earnings, not much of an effect.

The other issue, how we changed our approach to collecting data and therefore, how we accounted for revenue estimates for Betaseron earlier in the year.

What I thought I would do is let David Smith explain the issue.

I believe we talked about that in earlier calls this year.

Yeah, what we did is have a catch-up for non-US Tier II and Betaseron royalties.

In the past, sales were accounted for on a lag basis.

Royalties were on percentage of forecast, estimate basis.

In the first quarter, Schering was able to provide us with current information, so, what happens is we are able to account for things on a current basis, which means that we had a catch-up to do since we were on a lag and needed to true up.

That was about $8 million impact in the first quarter.

That came through in the fourth quarter.

For Q4 purposes it wasn’t in effect but for full year over full year comparison it was in effect.

Okay.

In regard to shifting the way you are going to be supplying on worldwide basis, Betaseron and Betaferon, what kind of impact does the revenue to product sales from royalties does it have on gross margin ?

Our reported gross margin is currently only on product sales where the royalties don't flow through gross margin on product sales.

Obviously, as we shift out of the royalty category into the product revenue category, we will report more revenues, but reported gross margin revenue percentage should be roughly the same as it is currently.

Okay.

Absolute level of gross margin will go up and result in increase.

Okay.

Great.

That's what I wanted clarification on.

On the blood testing business, could you walk through because I know in the past you have given numbers.

I just want to get an update.

In the last quarter, you gave some sense of market share in the US, which was high, something like 75 or 80%.

Where that has shifted now?

I think you have given us on a global basis, what your market share is relative to Roche and I just want to get a sense of how the shifting is occurring there?

In addition to that, you did mention the other opportunities, can you give us a better sense of the timeline of other regional opportunities might start to have an impact?

In both cases, over to Jack to go on.

Right here.

In the US, I think was disclosed in H&Q, that we have in 2003 over 80% market share.

And that is the case for 2003.

In Europe, we currently have 50% share in France, Italy, all of Belgium, Poland, and we have 100% of the Australian market and New Zealand Hong Kong, Singapore.

I think the disclosed total market share that we talked about worldwide is about 30%.

And the point I would make is as we go into 2003 by the end of the 2003 year on our market share and gross market share world wide would be very close to each other.

Other opportunities, we have signed an agreement with Ireland.

They should start testing in the second half of this year.

We expect to gain share in some of the Asian markets in the second half of the year, as well.

As well as gain additional share in Europe.

One last question.

Do you expect pricing to be similar also in the Asia countries?

The Asian countries are somewhat lower than the US.

But, all and all, the pricing is between $10 and $15 dollars per donation.

Great.

Thanks very much.

Your next question comes from Mark Augustine with Credit Suisse First Boston.

He has withdrawn.

One moment for the next question.

Your next question comes from the line of Meirav Chovav with UBS Warburg

Thanks for taking my questions.

The first question is regarding your cost of goods sold this quarter.

It was particularly high.

I was wondering other than the exception of what you said you had lower sales in Menjugate, is there any other explanation?

In terms of reported gross margin we were lower, I guess is what you are asking.

In the vaccine business, we had a couple of manufacturing items that is came up where we had to take reserve against products.

I'm sorry, in the biopharma business, vaccines occur earlier in the year.

And that's, we do report gross margin there.

David, do you have any other comments?

Gross margin was up in the quarter.

So, on the quarter, some product mix, was driven by manufacturing reserves we took in the biopharma group.

Could you quantify that or –

I don't think we can at the moment.

Okay.

Then, in terms of going forward, what in terms of '03, what kind of guidance would you give for the line item?

I think what we said in the previous call was about equal to 2002.

That is 2003 gross margin would be roughly equal to 2002 gross margin for the entire company.

We don't give guidance at individual business level, so we haven't commented beyond that.

Great.

In terms of Betaferon, how many patients do you have on drug?

That is a measure we have given before and stopped giving on the last couple of calls.

The reason is that it was always derived by calculation with a bunch of other things, including expected usage.

It was not a number we felt was very reliable and to be fair we are starting to downplay it.

Okay.

Then, my last question is on TOBI.

Launch in Europe, which countries have you already launched and which countries do you have left to launch?

We are in all of the major markets with TOBI.

Strong sales growth, with some of the life cycles is different, some earlier and some later.

We anticipate strong growth in the product in Europe as we actually move into what we call penetration phase of the market.

We typically think about TOBI sales if we penetrate the market.

After that, move into a compliance phase, where you know it’s a chronic used product, where we actually see different use over different patient populations .

Okay.

Great.

Thank you

Your next question comes from the line of Scott Rosenblum with Lehman Brothers.

Actually Craig Parker.

Can you hear me?

How are you, Jim?

I am sorry if I missed the first two minutes of the call.

Have you now stopped giving long-term earnings growth guidance or an objective?

No, we stated at J.P.

Morgan that our long-term growth goal is 20% earnings per share growth that was the number we talked about at the end of last year and continues to be our goal.

That number, as always, could be higher or lower in any given year. 2002 was above that level over 2001.

And we see that pattern in the past, but have no doubt you will see it in the future.

Long term on average, 20% is what we are shooting for.

Okay.

Can you tell us your current influenza manufacturer capacity is in doses and whether you are contemplating expanding that?

Other than the cell culture methodology that you eluded to earlier?

You know, I can get you the data on the doses, but I don't think I have it off the top of my head.

We are continuing to -- we are not going to put a major facility in place to manufacture additional flu vaccine.

We believe there is potential to increase the capacity out of our current facility, simply by stretching and improving yields and de-bottle-necking minor points and things like there.

Additional volume growth we believe we can get out of current facilities.

The reason we are not, we are working hard on the cell culture systems that we talked about on the call.

If successful, that will be our approach to expanding capacity when the product comes to market.

Okay.

And final question on the hepatitis B opportunity.

Of the US and western Europe units of blood that are tested, are any or many of those currently being tested with immuno aspect for hepatitis B?

Immuno testing for hepatitis B is the standard throughout year.

In Germany, there is already existing (inaudible) in hepatitis B.

Most of the markets have side-by-side process where they have immuno assay and the nucleic acid test currently?

Currently only immuno testing for hepatitis B. Germany is the only country in Europe that has routine hepatitis B NAT testing.

Side by side with respect to HIV, HCV being nucleic acid?

And then HCV being immuno assay?

Generally that is correct.

In practice, most of Scandinavia, the UK, has tested only for HCV NAT testing and they are beginning to move to both HIV and HCV NAT testing, which clearly benefits our test this is a multi plex test with both results from a single test.

Okay.

Thank you.

Operator, one more question, if that is okay.

Final question from the line of Thomas Lee with Deutsche Bank.

About Procleix and what were the factors that drove the market share shift in the fourth quarter?

Jack, if you are still with us, take that call.

The question I think, we lost the first couple of sentences.

Was market share shift Procleix and what was driving it?

Yes.

Well, quite a number of things.

One is that since we have been operating in the US and other countries, there's quite a bit of interaction of one blood center to another.

I think it is common knowledge at this point in time that using Procleix is much easier at high volume/high throughput situation than our competitive products.

In addition, the product services report has been counted as good.

And I think that the fact Chiron is focusing on blood testing and has a lot of credibility in that market and a lot of experience in that market, it has helped us gain share in the marketplace.

Okay.

On the West Nile assay is that separate assay or been multiplexed with HCV and HIV?

Separate assay.

It is being performed, however, on the same platform as Procleix.

Are there through-put restrictions at blood banks or anything like that that might make a separate assay commercially unviable?

Not at all.

We had a meeting last week with all of our customers in the US, and the fact that it is done on the exact same platform makes it a lot easier to implement.

From the operational perspective, it is very attractive to blood centers to have the test on exactly the same platform.

Competitor Roche has the region test on a separate platform from their existing test.

Which is a great advantage to us, the customer has to consider new platform if they are already using Roche anyway, they can use the existing platform if they consider using our test.

It is a great operational advance for us.

And one last housekeeping question.

I was just looking at product revenue breakdown that you sent out, probably straight-forward question.

The dynamics in non-flu and non-Menjugate vaccines, if you look at sequential growth, is that seasonality factor?

Yes, a lot of that is in the TFE area Q4 over Q3.

TFE is used in the season in which they go in the woods and get ticks picked up.

You don't sell much in the fourth quarter.

Thanks.

That concludes our Q and A period.

I will turn back to you, Jim. for closing remarks.

(laughter.) Once again, for the quarter and the year, we have proven Chiron is a company dedicated to delivering solid financial results and creating shareholder value.

As I have indicated, we see multiple opportunities for growth in all business units and are committed to taking advantage of the opportunities.

Those who have seen our presentations know we have outlined major goals for progress.

Let me highlight them here.

Chiron program priorities are personally for Procleix revenue.

We talked a lot about that.

Secondly advancement of meningococcal vaccines program.

Thirdly, advancement of our Proleukin monoclonal [ph] program and lastly clinical testing of next generation TOBI formulation.

We described how we expect to realize those priorities.

In terms of filings we anticipate achieving approval for Procleix Ultrial [ph], and also be making filing for (inaudible), West Nile assay and Proleukin Ultrial [ph] in the US.

In terms of pipeline progress, we look for Phase II advances in our Men D and ACYW vaccines and the liquid IL-2 Rituxin combination therapy trials.

Chiron expects our HIV and HCV vaccine candidates developed in collaboration with NIH, will enter Phase I testing this year.

We are looking for Phase I advance for flu cell culture derived vaccine.

We are focused on building the business for the future and remain committed to delivering financial results with reliability and consistency that is the hallmark of our past performance.

We look forward to sharing progress with you throughout the year.

I want to thank everybody for taking the time to listen to our call today.

Operator, that is the end of the call.

Thank you for participating in today's Chiron fourth quarter 2002 financial results conference.

You may now disconnect. (Normal Termination.) The call ended at 5:47. --- 0