Novartis AG (NVS) 2003 Q1 法說會逐字稿

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Chiron Corp.

Corporation conference call will start momentarily.

Good afternoon.

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

I would like to welcome everyone to Chiron Corp.

Corporation 2003 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 period.

Thank you, ladies and gentlemen.

At this time I would like to turn the call over to Mr. Martin Forest, Vice President of Corporate Communications and Investor Relations.

Thanks, Cory.

Good afternoon and welcome to Chiron Corp.

Corporation first quarter 2003 conference call.

On behalf of the Chiron Corp. team I would like to introduce you to the principal speakers, Sean P. Lance and James R. Sulat.

Howard H. Pien, Chiron Corp.'s CEO and president is joining us today.

I'm Martin Forest.

I'll be available after the call along with the team to answer any questions you may have. ¶ Before I turn the call over to Sean, I would like to remind you that remarks will contain forward-looking statements related to future events in the financial performance of the company.

Actual events may differ materially.

We refer you to the documents the company has filed.

These include the 2002 10-K report, the 10-Q report will be available shortly.

All files include information under the heading of factors in the MD&A portion of the document. ¶ This identifies factor that could cause the companies actual performance to differ from current expectations, including the timing and outcome of clinical trials, regulatory review, efficiencies of operations and research and development, the effectiveness of our partnership and sales and markets effectiveness.

Where we indicate a number to be pro forma, we have made available for reconciliation of pro forma and GAAP and condensed consolidated performance attached to our statement today. ¶ Reconciliation of first quarter along with pro forma and GAAP for prior quarters is available on our website at www.Chiron Corp..com.

Consistent with FCC regulation FD we do not undertake obligations to update forward-looking statements.

This call is electronically recorded.

No Copies can be made without express permission of Chiron Corp..

I'll turn the call over to you, Sean.

Seán Lance: Thank you, Martin.

Good afternoon and welcome.

Once again Chiron Corp. had a good solid quarter.

Today we have pro forma income of $56 million, or 30 cents per share.

This represents a 43% increase over the same quarter of last year.

When we reported pro forma EPS of 21 cents.

Revenues for the quarter were $307 million compared to $252 million in the first quarter of 2002.

A 22% increase.

The company's financial results are like the Chiron Corp. business model and the ability to harnes it. ¶ Multiple franchises and revenue streams across key businesses, Chiron Corp. is leveraging expertise to deliver financial results while voting on the company's future.

In particularly Chiron Corp. has a dynamic pipeline with programs we believe has potential financially and on human health worldwide.

This is an important year as we advance several programs across all key clinical phases with a promise of driving strong future growth.

As you'll see, we made excellent progress in moving the program to extend franchise in all three businesses.

First quarter has been an exciting and important quarter for Chiron Corp. for another reason as well.

The company announced the appointment of Howard H. Pien, CEO and president. ¶ All of us at Chiron Corp. are looking forward to his contribution to expanding the impact.

Howard brings a depth of global experiance and operational skills that make him uniquely qualified to head Chiron Corp..

I'll be introducing Howard later in the call.

First I'd like to talk about some of the highlights in the first quarter.

Let me begin with BioPharma.

In the first quarter the FDA approved the new label for Betaseron.

It treats all relapsing forms of MS, this affects patients with elapsing and progressing MS with relapses. ¶ The expanded labeling strengthens Betaseron's position in the market by reinforcing the importance of dose, high frequency administration in maximizing the products benefits.

The high dose, high frequency is well received by physicians and is an important part of the products appeal in the market.

The new labeling underscores how exciting Betaseron is in the market.

Currently the MS market is a $3 billion a year market widely estimated that it will grow to be a $5 billion market by the year 2006.

Chiron Corp. believes that Betaseron is well established in this growing market.

Having celebrated Betaseron's 10th anniversary, there development and promotional efforts have been reininvigorated by the three-prong effort of Chiron Corp. and marketing partners Shering AG. ¶ Clinical research product enhancement and innovative marketing efforts have combined to make Betaseron a strong competitor.

Shering is conducting three major trials labeled above, beyond and benefits which will involve thousands of patients to reinforce the value of Betaseron high dose high frequency clinical message and the benefit of early treatment.

Chiron Corp. and Shering are preparing to introduce new product enhancements including a saline syringe unit dose pack in the US to increase ease of use.

In addition patients of both programs including the beta centers and Betaseron education network are involving Betaseron sales.

These serve to meet the needs of patients while increasing Betaseron's visibility in the market. ¶ All of these things that I've outlined combine to make Betaseron's future an exciting one and the company to look forward to the product's continuing success.

An important expansion to the products franchise with our agreement to inquire the commercial and development right Cyclosporine, which is under the evaluation for the treatment of acute lung transplant rejection.

Chiron Corp. is well suited to develop this compound and market it to the community.

This opportunity will leverage our expertise in inhaled antibiotics and our strong presence with Pharmonologists.

Hospitals and patients with CF which is itself one of the leading causes of lung transplantation.

The franchise will allow us to move quickly in the market should the market gain FDA approval.

TOBI, the corner stone of our inhaled antibody franchise and we are permitting its values for ease of use. ¶ Chiron Corp. has decided to concentrate its development efforts for the formulation of TOBI suitable for delivery in a hand-held device.

This formulation which we are developing in collaboration with Nectar Theraputics is expected to enter the clinic this year.

Moving to oncology, Chiron Corp.'s program to explore the [ INAUDIBLE ] continues to make progress.

All clinical trials are under way.

Two in phase 2 and two in phase 1, Proleukin or second generation liquid formulation, this program is designed to demonstrate the value as an important addition to the MAB treatment.

This could benefit patients and open I02 to new and large markets. ¶ We anticipate having sufficient data from these trials to make a decision by the end of this year.

Now let me move on to vaccines.

This was a very important quarter for vaccines with progress in two of our key franchises.

Going on our groundbreaking research in meningitis, we believe we can be a leader in the fight against the 5 primary sterotypes that cause this disease.

We believe this is eventually a multibillion dollar market and intend to build a portfolio of products to meet the market needs.

We are excited about the potential this program has to transform Chiron Corp.'s vaccine business. ¶ Chiron Corp. made a significant advance in the franchise this quarter with the start of a phase 3 trial for vaccines to prevent C disease.

This will extend to the existing database to include a US population.

We anticipate as we will be able to complete the phase iii trials and present the data to the FDA next year.

Approval of Menjugate in the United States would create commercial as well as strategic value for the company by building Chiron Corp.'s presence in the U.S. and establishing the companies Meningococcal vaccine franchise. the franchise in the first quarter as well. ¶ We have seen promise in phase i results where a combination ACYW vaccine based on safety, we will be advancing a program to phase ii later this year.

Development of a broad vaccine has challenged researchers for decades, because of a multitude of substerotypes and inability to develop an effective vaccine.

Chiron Corp. is in a leading condition to develop such a vaccine which would invest [ Inaudible ].

We have seen positive proof of concept data from the phase i trial from the vaccine.

This has raised our confidence in the potential of a second generation vaccine candidate.

We expect to bring the second generation candidate into phase i testing next year. ¶ The other vaccine franchise with exciting potential is our flu franchise.

The dynamics of the flu market have been changing for a number of reasons.

The other vaccine franchise with exciting potential is our flu franchise.

The dynamics of the flu market have been changing for a number of reasons.

Calling for annual vaccinations for the 50-65 age group.

Flu is increasingly recognized as a major health threat killing more people in the United States annually than aids.

Departure from the conventional market has impacted supply while the possible introduction of an internasal vaccine has only heightened awareness of the value of vaccination.

Combine these factors presents an opportunity for Chiron Corp. with a proven expertise in flu vaccine.

Chiron Corp.'s flu franchise has been a strong performer. ¶ We believe we can sell more if we increase production through a flu cell culture system.

Based on phase i results, Chiron Corp. is initiating phase ii trials for the vaccine.

The development of a cell culture vaccine would allow us greater flexibility and allow Chiron Corp.'s expanded leadership position in this field.

I'd like to turn to blood testing.

Chiron Corp.'s third business.

This is yet another record quarter.

As we approach the first full year of commercial pricing in the United States, the franchise continues to drive as a company. ¶ The HIV-1/HCVSA continues to make inroad into new and unpenetrated markets due to the high level of sensitivity and the quality and strength of customer service and support.

In addition new customers, new SA's will be an important component for the growth of the franchise.

Chiron Corp. and its collaborater made an important step toward expansion with the FDA's acceptance for the West Nile Virus SA.

Both companies are moving swiftly to meet an unmet medical need earlier identified last fall, a testament to our commitment to improved blood safety and the value of Procleix, increasing ease of use for our customers.

Chiron Corp. expects the new SA to be available and testing on a cost recovery basis by July 3 in line with the timetable requested by the federal health authority. ¶ Chiron Corp. and Gen-Probe are expanding leadership in blood safety with new indications for Procleix.

For example the West Nile Virus includes screening tissue and organ donation.

We also expect to drive growth in the franchise with the Procleix SA which ads a Hepatitis b virus SA to the current SA.

Chiron Corp. expects the IND will be filed in the United States in the second half of the year.

Recognizing the importance of the European market, Chiron Corp. is working to insure it will complete the process this year.

We have already received a CE mark for Procleix HIV-1/HCV SA and also for HIV and HDV 6 which we sell through our joint business for clinical diagnostic.

These are a sign of our ability to perform the market's requirements well in advance of the deadline. ¶ As you can see, Chiron Corp. made major advances throughout its franchise in the first quarter fulfilling several important goals that the company outlined for itself at the beginning of this year.

Now I would like to introduce Chiron Corp.'s CEO and president so that he can say a few words.

All of us at Chiron Corp. are delighted that Howard has joined Chiron Corp..

I am confident he has the vision and skills to realize the opportunities here and I look forward to his combination in the company in the months and years to come.

Thanks, very much.

I am very pleased with the opportunity to be here at Chiron Corp..

Our scientific excellence is well known, the management team and Chiron Corp.'s employees, the company has both the drive and the capacity to execute strategy, a long-term future growth.

As Sean as has just outlined, the company has gotten off to a very strong start this year, Betaseron received a new set of labelings, we have in-license cyclosporine, we have crossed multiple milestones in our Meningococcal franchise and advanced flu-cell culture and the IND for the West Nile Virus SA was accepted.

All of these accomplishments highlight how dynamic a time it is for Chiron Corp.. ¶ This year, we're seeing clinical programs in key franchises advancing which should bring greater clarity to the timing and the size of the opportunity that these programs represent.

Chiron Corp.'s accomplishments to date highlight the company's commitment to execute strategy for growth.

In the coming months, I will be taking more time to talk to you about our vision for Chiron Corp.'s future.

In the meantime, let me say once again, how excited I am to be at this great company.

I'm looking forward to building on the foundation that Sean has established and to enhancing Chiron Corp.'s impact of human health so that we can create even greater value for our shareholders.

Now I'd like to turn the call over to James R. Sulat.

Thank you.

I'd like to begin with results for the quarter.

All earnings for share amounts discussed refer to the pro forma diluted per share earnings.

We present our financial results on as reported or GAAP basis and pro forma or non-GAAP basis.

Adjustments to arrive at pro forma consistent of amortization related to the pathogensis acquisition plus the Biogen settlement in connection with the McCormick patent and discontinued operations with the sale of our diagnostic system. 2002 consisted of a writeoff technologies related to the matrix acquisition and amortization expense with tangible assets related to the pathogensis and Chiron Corp. bearing acquisition. ¶ Reconciliation between our GAAP and pro forma results can be found at our website at www.Chiron Corp..com.

For the first quarter of 2003 pro forma income of $56 million or 30 cents per share.

This result was approximately 43% higher than the earnings per share of 21 reported in the first quarter of 2002.

Revenues for the first quarter of 2003 increased to 22% to $307 million from $252 million for the same period of 2002.

Product revenues increased 26% to $219 million from $174 million a year ago.

Increases in sales received primarily in TOBI, Betaseron, travel vaccines and Procleix.

Equity and earnings was up on strong joint business profits plus a onetime benefit in 2002 relating to our sales.

Collaborative agreement revenues, royalties and license fees and revenues increased slightly due to HIV-1/HCV product royalties from our property portfolio partially offset by the timing of contract manufacturing activities. ¶ Gross margins decreased to 61% from last year's margins of 62%.

Research and development expenses for the first quarter of 2003 totalled $82 million up 4% from the first quarter of 2002.

The increase primarily related to the development of cyclosporine and flu cell culture.

SG&A expenses totalled $73 million as compared to $63 million the first quarter of 2002.

Increased SG&A expenses reflect increased marketing across the business.

Our estimated full year effective tax rate is 25% down approximately 2% from last year.

The tax rate decrease which was expected reflects the implementation of several tax planning strategies we believe is sustainable over time.

I'd like to move on to a review of financial results. ¶ BioPharmaceuticles product revenue including Betaseron royalties were $116 million for the first quarter 2003 up from $104 million from over a year ago quarter, a 12% increase.

Increases in TOBI, Betaseron and Proleukin.

Our first quarter TOBI sales were 41 million, up 14% from a year ago period due to the progress of TOBI across Europe, increased patient demand and compliance in the United States and benefits of the movement and exchange rates offset by ordering patterns.

Generally positive exchange rate affected year over year comparisons from most of our other products. ¶ First quarter sales of Betaseron including royalty by Betaseron were $43 million versus $35 million last year, an increase of 23% primarily due to price increases and a decrease in U.S. inventories at our partner Berlex in the first quarter of 2002 in anticipation of the second quarter launch of our room temperature stablization of Betaseron.

These factors were offset by onetime benefit in the first quarter due to a catch up relating to our non-U.S.

Betaseron sales and royalties.

First quarter sales of Proleukin were up 8% due to price increase.

Gross margin in the biopharmaceutical increased 79% from last year's 77% and this increase is primarily a result of price increases. ¶ Turning now to vaccines.

In the first quarter of 2003 total product revenues for the purpose of vaccine were $68 million versus 58 million in the same period last year.

Increases in travel, flu and Menjugate vaccine.

Sales from travel vaccines were $26 million in the first quarter up 40% from the year ago period.

TBE was the principle growth driver as it had a successful quarter in the German market.

The first half is the traditional season for this product.

Our first quarter Menjugate sales were 8 million up 31%.

This increase was driven by increased sales to the Italian market.

Sales of pediatric flu and other vaccines were $31 million in the first quarter of 2003 consistent with the year ago period. ¶ Gross profit for vaccines increased to 49% from last year's gross margin 48%.

Gross margin for the first quarter of 2003 was negatively impacted by an expected temporary shutdown of certain facilities to ensure compliance with requirements.

Moving to our third business, blood testing.

Blood Testing total revenues including product sales, Chiron Corp. share of earnings from the joint business, royalty and license fees increased to $93 million in the first quarter of 2003 from $57 million in the year ago period.

This increase was primarily due to commercial pricing and market share gains in the United States, product sales of Procleix as well as an increase in joint business earnings and high royalty earnings relating to testing.

Product revenues recognized in the first quarter of 2003 include a full quarter of commercial pricing in the U.S. for Procleix and continued penetration in markets abroad. ¶ Revenue reported in equity in earnings was up on increased joint business profits and a onetime benefit of approximately $4 million in the first quarter of 2003 due to a change in estimate related to non-U.S. affiliate sales.

Previously we accounted on a one quarter lag.

More current information is available to us and we now recognize non-U.S. affiliate sales on a one month lag consistent with the rest of ortho's business.

On a separate matter as you know in the first quarter Chiron Corp. was granted a patent from the United States directed to NAT methods.

This triggered an obligation for a payment of $10 million from Roche.

While we have not received these funds, and therefore not reflected on the financial statement, we expect Roche to make this payment. ¶ However if permitted under the terms of the licensing agreement, Roche has agreed to institute arbitration procedings and Chiron Corp. has agreed to this arbitration.

Back in summery then, Chiron Corp. had a fine performance in the first quarter of the year.

Delivering strong financial results while again making progress in building systems.

A couple of notable accomplishments for the quarter, IND for West Nile Virus is accepted by the FDA accomplishments for the quarter, IND for West Nile Virus is accepted by the FDA and enable testing in time for the mosquito season and increasing the safety of the blood supply.

Key advances in our flu vaccine franchises, initiated a phase iii trial for Menjugate, advanced our ATYW for phase ii and moved our flu vaccine into phase ii. ¶ Received approval for Betaceron in all relapsing forms of MS and allow us to leverage our expertise and experience and inhaled antibiotics.

On the financial side, above or at expectations.

Revenues were solid.

While foreign exchange movement did affect our top line underlying growth was strong.

Operating expenses were well controlled.

While we continue to invest in operating oppertunities across the business and operating margins continue our pattern of strength consistent with the past several quarters.

Finally our earnings per share growth reflects the opportunity for growing, global and diversified business validating our business model yet again this quarter.

We are reaffirming our pro forma guidance for 2003 from 1.40 to 1.50 per share, while we at the same time expect to add to the foundations of the business that will allow us to grow shareholder value over the long-term. ¶ Lastly let me add a personal note as this will be the 20th and final conference call for Chiron Corp., I wanted to say how much I enjoyed the relationship with you while on this call and others in the investment community.

Our discussions have always been lively, thought provoking and entirely professional and I thank you all sincerely.

I believe Chiron Corp. is left in the best of hands with the new officer and David Smith is the Chief Financial Officer.

Solid and respectful relationships with analysts and I hope Sean and I have that.

Chiron Corp. has an extraordinary set of opportunities they are pursuing.

The impact on human health has been fundamental.

I believe the best for Chiron Corp. is yet to come.

I intend to remain a friend and shareholder of Chiron Corp. in the future and look forward to seeing what the company can accomplish.

Thanks, Jim.

That concludes our prepared remarks.

Now I'd like to open up the call for questions.

We are joined by Jack Goldstein, Bruce Scharschmidt Vice President of Clinical development, David Q-and-A.

Thank you.

At this time I would like to remind everyone if you would like to ask a question press star then the number 1 on the telephone keypad.

If you would like to make a question or a comment, press star 1.

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

And we'll take our first question from Dennis Harp with Deutsche Banc.

Congratulations on a good quarter.

On Procleix, can you explain why there doesn't seem to be any growth at all from the fourth quarter to the first quarter of 2003?

Did you lose some market share or have you had to get some price consessions to gain some business?

What happened to the growth?

Let me turn that over to Jack because I think he's in the best position to answer it.

Neither of those things occured.

What did happen as you will recall that we spent the first half of the year really transitioning from IND to license products and from negotiating pricing over to commercial pricing so really the first half of the year was spent doing that.

Increased market penetration and increased geographic expansion changed in the latter part of the year particularly in the fourth quarter.

A lot of the customers have not started up at this time and really starting to come on board between now and July 1.

So we're anticipating increases in market share and revenues as we look through the rest of the year.

But just to point out fourth quarter of '02 you did $42 million first quarter of '03, also $42 million.

You had no expansion in the business at all in the three months of the beginning of this year?

In the beginning of the year, yes, we did sign on many new customers.

Those customers take about 90-120 days to come on board.

I see.

Okay.

If I could just ask one more question on NAT and that is where areyour competitors with Hepatitis B NAT tests and West Nile Virus tests.

You really only have one competitor with NAT and that's Roche.

Do you have a sense of where they are?

I don't think we can comment specifically on where they were.

You'll have to get that information from Roche.

Our information is that they do have a West Nile Virus Assay and they recently released a press release I think it was yesterday or the day before they have installed their instrumentation at two or three of their customer sites and you expect them to be there and on the market competing with us.

In terms of Hepatitis B, I have no information.

Next question is from Jennifer Chao at RBC Capital Market.

Thanks for taking my question.

I'd like to extend congratulations to Howard and best wishes to Jim on the recent announcement.

With regard to the blood testing area, can you discuss the continued penetration of Procleix that would help us track Prague on that front.

Okay, this is Jack again.

Let me give some clarity to what is happening.

As you know in Europe as of the end of last year, we had penetrated about 50% of the French market, 50% of the Italian market, 100% of Belgium and a smaller share in Spain, Portugal and poland.

And so those are reflected in the first quarter of 2003.

In addition, we had recently won a tender in the U.K. for 1/3 of the U.K. business or 800,000 units which should begin this summer.

In addition, we were awarded a contract in Ireland.

Testing has not begun yet but should begin also some time this summer for about 200,000 units.

We are continuing to penetrate further into Spain and also in European countries as well.

On the Asian front, again as we said previously, we have 100% of the Australian market, New Zealand, Hong Kong, Singapore, the markets in Hong Kong and Singapore are experiencing some reduction in the number of donations that are occurring and have occurred over the past couple of weeks, certainly.

We expect that to continue into the next couple of months depending on what happens with SARS.

We have trials ongoing in Korea and in Thailand, and we're starting a trial in China which has not started for obvious reasons but we believe we'll get business this year in Korea and Thailand, at least.

In addition, at the end of this year, we hope to introduce the Hepatitis b component which is important in Asia as well as Europe for those markets.

All right, that's helpful.

With respect to Betaceron, could you discuss the U.S. patient market share, the extent to which market share has been affected and expectations for patient market share exiting 2003?

Sure.

I think what we see in terms of market share trends in the United States in the face of the launch is interesting in the sense that Betaceron appears to have held its own depending on how you're looking at the lines, conceivably has gained in the face of that launch.

When you think about how Pfizer are selling in the marketplace, they h the launch is interesting in the sense that Betaseron appears to have held its own depending on how you're looking at the lines, conceivably has gained in the face of that launch.

When you think about how Pfizer are selling in the marketplace, they hthe launch is interesting in the sense that Betaseron appears to have held its own depending on how you're looking at the lines, conceivably has gained in the face of that launch.

When you think about how Pfizer are selling in the marketplace, their launch is interesting in the sense that Betaseron appears to have held its own depending on how you're looking at the lines, conceivably has gained in the face of that launch. ¶ When you think about how Pfizer are selling in the marketplace, they h the launch is interesting in the sense that Betaseron appears to have held its own depending on how you're looking at the lines, conceivably has gained in the face of that launch.

When you think about how Pfizer are selling in the marketplace, they hthe launch is interesting in the sense that Betaseron appears to have held its own depending on how you're looking at the lines, conceivably has gained in the face of that launch.

When you think about how Pfizer are selling in the marketplace, they h the launch is interesting in the sense that Betaseron appears to have held its own depending on how you're looking at the lines, conceivably has gained in the face of that launch.

When you think about how Pfizer are selling in the marketplace, they have targeted Avanex as their primary counter sell.

Selling the advantages of higher dosing levels as having clinical benefit for multiple sclerosis patients, our product Betaseron has that higher dosing level and can piggiback on that message, one weave targeted Avanex as their primary counter sell.

Selling the advantages of higher dosing levels as having clinical benefit for multiple sclerosis patients, our product Betaseron has that higher dosing level and can piggiback on that message, one we have been selling as well.

We believe this is a trend that will continue.

We expect it to get market share, I will guess they will get most out of Avanex, not out of Betaseron.

So does -- am I hearing right, you're not seeing a significant number of patient switches to Rebis?

Out of Betaseron?

Yes.

Yes, that's correct.

Thanks.

Next question is from May-Kin Ho at Goldman Sachs.

Hi, can you give me an update on what's happening on the European litigation concerning the NAT tests in some countries and then also why is Roche now contesting the payment because I think the agreement was pretty well defined.

Lastly on Menjugate, what is the indication that you'll be getting in the U.S., is this a narrower population than in other countries?

Let me let William G. Green answer the first two.

How are you?

I'm good.

Thank you.

On the European complaint, there is no new news.

The matter is still before the commission.

The commission has not brought it into an official status.

We continue to have discussions but there is no ability to predict when or how that matter will be resolved.

Essentially as we have previously described it, [ Inaudible ] not gotten into a formal complaint recognize d by the process.

The second question on Roche relates to the right they have to investigate the application of future arising patents to current and future products as it relates to our HIV licensing rates.

The new patented issues in the United States had not previously been investigated into the application of that patent of their products and engaged us and agreed it can be engaged alternative to resolution arbitration process when it arise.

And let me ask you to respond to the Menjugate matter?

Sure.

The phase iii trial just started with several thousand subjects age 2 and above.

Currently available from other trials largely conducted across the U.S. and that corresponds for the ages for which we will be seeking approval.

The use recommendation with the product groups such as the ACIC and the American academy of pediatrics.

Our base case assumption is direct recommendation for outbreak use and continue to see outbreaks annually in several areas of the United States.

Approximately how big a market is that?

I think we could best characterize it in terms of unmet need.

We continue to see outbreaks on a regular basis.

No part of the U.S. has been spared.

Texas, Rhode Island and Kentucky, I would characterize it qualitatively as an opportunity which would fill an important unmet need to make the vaccine available.

One last question on SARS, are you doing anything on the diagnostic vaccine side of that.

May-Kim, we've been following the epidemic and sequenced the virus mapping and the corona virus believed to be responsible.

This was done in collaboration with Germany and the University of British Columbia.

The sequencing, of course, is really just a starting point in the development of the vaccine or diagnostic and in close touch with authorities to see how we can invest this global epidemic.

The next question from Meirav Chovav with UBS Warburg LLC

Thanks for letting me ask a question.

I have two questions.

One is on the lung transplantation, the press release didn't have a lot of detail on where the program is at so I'm wondering if you can give more detail on those trials, where you're at and when you intend to file.

Does the drug have better efficiency or is it simply a better profile because it's mobilized and does it have application to broncites and complication.

My second question is about the flu vaccine and the cell culture.

Would expansion in the U.S. market be possible with positive results here.

Can you -- in addition to expanding amount of vaccine making go into new markets and when can you get approval.

Thanks.

Perhaps you can answer the question on the cyclosporine products.

Let me provide more background, there's a product concept in the sense of delivering the drug [ Inaudible ] with respect to your question about the current status, there was clinical steadies conducted at the University of Pittsburgh involving 60 subjects.

University of Pittsburgh is a major transplant center.

Those results suggested cyclosporine [ Inaudible ].

Job one for us is to work with investigators there to determine the suitability of this data and the data with the FDA.

After we completed these steps which we hope to complete by the end of the year, we'll be in a better position with regard to timing and product opportunity.

On the flu culture, we have indicated previously that getting into the United States market is something we would like to do with our vaccines business.

The flu cell culture de velopment is clearly one of the probabilities for accomplishing that goal.

It's too early to give you specific timeline or yes or no answer to the United States market.

No question it's one of the things we are evaluating.

The existence are close brothers and will be overtime but more likely an approach to manufacturing the vaccine and have a better control of process and perhaps over time develop a lower cost base for these products.

Thank you.

Next question is from Thomas Way of Piper Jaffray.

I had a couple of questions for Jack and for Jim.

First of all on the royalty rates you recognize from Roche, was there a step up in royalty rates following their approval in the U.S. or approval of the HIV patent.

Also I'm trying to understand the near term commercial impact of Europe and Asia over the near term, how competitive to your see your product being relative to say prison-based HPB antigen tests and will the blood banks Europe and Asia have access to upgrades and just a couple of house keeping questions on the financial front.

Share repurchase program, were there share repurchases in the quarter and how much is left in the program.

And a question on gross margin for the biopharmaceutical margin.

We saw uptick.

Can you remind me what happened in the fourth quarter with gross margin?

Okay.

We'll give it a shot.

If we miss one I'm sure you'll remind us.

The first is royalty rates from Roche and I'll let William G. Green answer that one.

The question is can we expect to see royalties with the issueance of HIV and the answer to that is yes.

That was short and sweet.

Thank you.

On the matter of Alltrio, you can take that one.

We believe it is extremely competitive.

We are in the process of getting approval in Europe and that will allow us to anchor the European market at the end of the year or the beginning of next year.

We don't expect significant revenues from Altrio this year but a start and the full launch in Europe and Asia for next year.

In terms of competitiveness with prison and the current immune diagnostic tests, there have been several studies published to show it does close the window significantly and I don't have the specifics at the tip of my tongue and exactly the number of days that it closes.

But the fact is that today in Asia and a number of countries there still are confusions transmitted Hepatitis b cases.

The share repurchase program was about a million shares repurchased and 4 million remaining to be repurchased.

On gross margins for bioforma, we highlighted in the fourth quarter we had taken product reserves which it depressed the margins in that quarter.

¶ The next question is from Eric Schmitt from SG Cowan.

Good afternoon.

Maybe you could refresh from a tax rate how you're getting a 25% rate and how you think going forward that is sustainable and also on gross margin in Q1 overall for the business, some product mix that's taken it down a notch.

Could you provide detail for what's going on there?

Let me respond to the tax rate.

We talked about undergoing substantial tax planning and we are continuing to do that.

As we develop plans we implement that.

The continuation of execution has led to continuing trends increasing our tax rate.

We stepped it down last year and this year with that rate that we mentioned and we believe that's a stable rate at that level.

The best way is to think about it in the context of Chiron Corp.'s business.

Half of our revenues outside the United States and profits outside the United States.

If you look at that tax rate at the 25% ratio reporting now versus other similarly situated companies in our sector, many biotechnology companies don't have that foot print, it's a comprable tax rate and a variety of techniques that people use to accomplish that goal and what we have over the course has put a number of steps in place.

We think it's right and it will be a sustainable rate and the rate you should think about going forward.

Sure, Jim.

The overall margin where we were most impacted on a sequential basis was the difference in flu sales, obviously, we sold a subsequent portion of our Menjugate activity in the fourth quarter and we had a lot of flu sales.

Some Menjugate sales during the course of this quarter and obviously the season as hased for -- passed for flu and we had little flu activity and that's what drives the movement in the overall margins.

Next question is from Scott Rosenbloom with Lehman Brothers.

Thanks for taking my question.

I wonder if you could quantify for me more of the foreign exchange for the quarter?

The gains on a year over year basis, obviously in the terms of the euro to the dollar, the impact on Chiron Corp., though, was about 8% on a year on year basis.

On the top line and somewhere in the range of about a penny in terms of operating income, don't forget that Chiron Corp. is self-edge hedged with our offshore operation.

Thank you.

The next question is from Timothy Lee of Merrill Lynch.

Good afternoon.

Just a follow-up question on the Procleix revenue.

What percentage of the sales were tied to instruments versus actual revenue related to tests and how that compares to Q4 mixes?

Okay.

I don't have the specific figures but very, very little.

Instrumentation is generally sold when a product is launched and so at this junktture, I would venture to say it's well over 90%.

So in terms of a sequential basis, while revenues were flat, do we see an uptick in testing volume?

As we move forward through this year, we will see an uptick in volume and, in addition we'll see the addition of West Nile Virus starting in July.

And one more if I may, the geographic split of the $42 million?

We prefer not to respond to that one and I'll break in at this point.

The reason is pricing in this sector is extremely sensitive since there's only two competitors and a good analyst if we gave you that split could work backwards so we've been judicious about answering that question.

My apologies but that's the reason for it and the notion that the NAC portion, clearly numbers are flat as we indicated but we fully expect this to grow over the course of this year.

We told you we expect it to and that's what you'll see in the quarters that will last over the rest of the year.

We are coming up to time here.

Perhaps, operator, if we can take one more question.

Yes, sir.

The final question from Allen Rain from CIBC World Markets.

Thank you for taking my question.

The timeline for commercial enumeration of the West Nile Virus Assay and potential use of Altrio and West Nile Virus can affect the price.

In terms of West Nile Virus at this juncture we filed an IND and intend to release it for testing in the U.S. market starting at around July 1.

For the foreseeable future after that, we would be looking at recovery pricing associated with it.

At that juncture, we anticipate that trials could start sometime toward the end of this year, the beginning of next year.

It also depends on what happens in terms of the FDA, what happens with the evolution of this virus.

If testing continues and if we move forward, probably see sometime in 2004, beginning of 2005.

And then anybody's guess when the FDA will approve it.

In terms of Altrio pricing, we said we expect a premium from thedation to the other two Assays.

We haven't actually disclosed specific pricing.

Great.

And lastly, can you comment on the progress of pool to single donor testing in the U.S.?

I think in part, the addition of West Nile Virus has slowed down movement toward single donation testing to some extent.

Would be difficult for the Red Cross and independent blood centers to take on smaller pools in addition.

Having said that as we said previously at the blood products advisory meeting, the FDA had specifically indicated there should be a move toward initial testing as companies in this market roll-out.

There has been a move [ Inaudible ] to occur until probably next year until West Nile Virus is.

Okay.

We are coming up on the hour so that concludes our question and answer period.

I'd like to turn the call back to Sean.

Seán Lance: Thank you, Martin.

Before I proceed with the closing, I want to record how saddened I am that this will be Jim's last earnings call with Chiron Corp..

By now you all know that Jim has decided to pursue other opportunities outside of the pharmaceutical sector and leaving Chiron Corp. with our best wishes.

All of us are grateful for Jim's contributions for the past years to help make Chiron Corp. into a financially strong company at least today.

Jim has played a major role in bringing a sense of financial discipline with a focus on solid financial results and shareholder value.

His work will leave an important and lasting influence on Chiron Corp. in the years to come.

We'll be winding down by midMay and presenting in a series of conferences in the next weeks to give many of you the opportunity to wish him well and to thank him for the exempary job he has done in Chiron Corp.'s vision and growth to the financial community.

Now let me conclude today's call by saying that once again in the last quarter Chiron Corp. has showed that it is dedicated to financial results and future growth and delivering of shareholder value.

As I indicated advances in our key franchises and have significant potential for the company's future growth.

These advances leave the company for achieving results in the year and long-term results.

Results in the fourth quarter and the last years prove that Chiron Corp. is headed to reaching opportunity.

I came to Chiron Corp. razz an agent for change.

China today is significantly different from the China of five years ago.

The company is focused on the quality of infectious disease, three business units and senior management teams well prepared and skilled to grow our vaccine biopharma and blood testing business.

Our commercial applications are aligned to quality and the ability to execute on plan of corn stone of the business.

The business is sound, strong and positioned for growth and shareholder generation.

Now that China has accomplished the goals, I believe the company can achieve new levels of success.

I'm confident under Howard's leadership, Chiron Corp. will continue to expand on human growth globally.

I thank you all for being on the call today.

Thank you.

Ladies and gentlemen, this concludes Chiron Corp.'s first quarter 2003 financial results conference call.

Thank you for your participation and you may now disconnect.