Novartis AG (NVS) 2003 Q2 法說會逐字稿

At this time, I would like to welcome everyone to the Chiron second-quarter 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 Q&A period. (CALLER INSTRUCTIONS).

I will now turn the conference over to Mr. Martin Forrest.

Good afternoon, and welcome to Chiron's second-quarter 2003 conference call.

On behalf of the Chiron team, I would like to introduce you to our principal speakers -- Howard Pien, Chiron's CEO and President, and David Smith, Chiron's CFO.

I am Martin Forrest from the Corporate Communications and Investor Relations group.

I will be available after the call today, along with the investor relations team, to answer any questions that you might have.

Before I turn the call over to Howard for a discussion of Chiron's results, I would like to remind you that our remarks today will include forward-looking statements relating to future events and the financial performance of the Company.

Actual events and performance may differ materially from our expectations.

We refer you to the documents that the Company has filed with the SEC; these include the 2002 10-K report and the first-quarter 10-Q report.

The second-quarter 10-Q report will be available shortly.

All the filings include information under the heading factors that may affect future results in the MD&A portion of the documents.

This information identifies important factors that could cause the Company's actual performance to differ from current expectations -- including the timing and outcome of clinical trials, regulatory reviews, manufacturing capabilities, efficiencies of operations in R&D, the strength of our management team, the effectiveness of our partnerships, and sales and marketing effectiveness.

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

The reconciliation for the second-quarter, along with the reconciliation of pro forma to GAAP for prior quarters, is also available on our website, www.Chiron.com.

Consistent with SEC Regulation FD, we do not undertake an obligation to update the forward-looking information we are giving today.

Finally, please note that this call is being electronically recorded and is copyrighted by Chiron; no reproductions, re-transmissions, transcripts or copies of this conference call can be made without the written permission of Chiron.

With that as a preface, I will turn the call over to you, Howard.

Thank you.

We're pleased to be reporting our second-quarter results this afternoon.

It has been an eventful spring for Chiron, and certainly for me personally.

The completion of the PowderJect acquisition earlier this week brings to Chiron new opportunities and challenges in a field where there is good potential for improving health through prevention.

Since our last earnings call, we made several important advances that will help drive growth from the immediate through the long-term future.

Let me highlight five of these advances for you.

One, the acquisition of PowderJect now makes us the second largest manufacturer of flu vaccines in the world, and provides us with a strong platform to launch new products in the US.

This acquisition will help move up our growth for the vaccines business from the mid-term to the immediate future.

Two, we introduced the Procleix West Nile Virus assay on a cost recovery basis under an IND in the US, setting the stage for accelerating growth in the blood testing business.

Three, we saw the fair resolution of the European Commission inquiry with an agreement that preserves our NAT per donation royalty structure, and also recognizes the value of our IP.

Fourth, we licensed our HIV and HCV technology to Baxter for use in Europe for plasma fractionation.

And five, we made key leadership appointments in BioPharma, an important step in fulfilling our long-term growth strategy for this business.

So, you can see from all of these events that Chiron is generating momentum and increasing shareholder value.

We continue to produce solid financial results.

Today, we are announcing second-quarter pro forma EPS of 35 cents, a 21% increase from the same period last year.

Our accomplishments demonstrate our ability to leverage our validated business model, combining growing franchises with a strong intellectual property portfolio, while continuing to invest in innovation. 2003 is an important year for Chiron, as several of these investments reach key junctures for advancement.

Now let me highlight some of the areas of progress in each of the business units.

BioPharma is continuing to enhance its focus on key programs.

We strengthened our leadership team in the second-quarter with two key appointments.

Dr. Ken Bair joins us as Senior Vice President and head of the BioPharma research.

Ken has extensive oncology experience, having led oncology programs at Novartis, and more recently at Pharmacia.

Also joining BioPharma is Carl Pelzel, Senior Vice President and head of BioPharma commercial operations.

Carl brings to Chiron more than ten years of global commercial experience from Glaxo Smith Kline.

The appointments of Ken and Carl are important steps in BioPharma's goal of enhancing our capabilities focused in cancer and infectious disease.

Chiron's BioPharma products are performing up to our expectation.

Betaseron's high dose, high frequency message has distinguished it in the growing MS markets.

At a European Neurological Society annual meeting in Istanbul in June, our partner, Schering AG, presented a data from a blinded, controlled 64-patient study, showing that Betaseron -- as compared with Rebif -- was associated with less pain and fewer skin reactions at the injection site.

We believe that Betaseron will continue to grow along with the market as we introduce product enhancements, including a saline (indiscernible) syringe, and see further clinical data which will bolster Betaseron's clinical message.

Betaseron will undergo a financial transition beginning in the fourth quarter of 2003.

In large part, this transition is the result of provisions in our long-established agreement with Schering.

Later in the call, David Smith will discuss the financial impact of these changes in more detail, but for now, just a few statements of context from me.

Betaseron is an important product for us, and we see attractive opportunities for growth.

Continued lifecycle management of Betaseron, working in collaboration with our partner, Schering, remains a key priority of Chiron management.

We see opportunities for other BioPharma products, as well.

TOBI has become the goal standard for treating pseudomonal lung infections in cystic fibrosis patients.

TOBI has improved the health of cystic fibrosis patients worldwide, thereby achieving commercial success for Chiron.

The overwhelming majority of CF patients with advanced pulmonary disease use TOBI.

TOBI is showing its value in earlier stages of the disease, as well.

At the European Cystic Fibrosis conference held last month in Belfast, Chiron presented the results of a 184-patient open label study, showing that the patients with milder pulmonary disease undergoing TOBI treatment in conjunction with routine care were significantly less likely to be hospitalized for respiratory symptoms.

Further showing the Company's interest in valuating in TOBI's use in less severe patient populations, Chiron has also announced the start of a study called the ELITE, to examine the potential benefit of early TOBI treatment at the onset of pseudomonal infections.

TOBI has been a fast-growing product for us, and along with such rapid growth comes the rising risk of competitive threats.

Chiron has filed a patent infringement suit against a generic manufacturer who has been granted tentative approval for a generic version of TOBI.

The approval, which is based on that generic product's purportedly being an equivalent to TOBI, will remain tentative as long as TOBI holds orphan drug status.

Our patent covers TOBI and its equivalents; we therefore believe that the generic infringes.

We have filed our suit well in advance of the expiration of TOBI's orphan drug status to protect the value of our product.

We are committed to continued investment in the CF market.

A key strategy is the development and commercialization of the dry powder formulation and handheld device which would increase ease-of-use for the patients.

The IND for this new product, which we are developing in collaboration with Nectar (ph) Therapeutics, has been accepted by the FDA, and we initiated Phase I testing last week.

Moving to oncology.

Chiron's program to explore the role of IL2 in combination with monoclonal antibodies continues to make progress.

Enrollment continues in the four clinical trials underway -- two in Phase II and two in Phase I -- with both Proleukin and the second generation liquid formulation, and in combination with Retuxin or (indiscernible).

The program continues to attract strong interest from physicians, as illustrated by the success of our ASCO symposium.

We expect to have sufficient data from these trials by the end of this year to advance to the next development milestone.

We are also making progress in our Phase II program for tezacitabine, which is our next generation Nucleoside Analog.

Two trials are currently underway, one in colorectal and the other one in gastroesophageal cancer.

This is part of an aggressive program to determine the specific tumor types that the compound is most effective in treating.

We believe that tezacitabine has substantial potential as an oncology treatment, and we are committed to screening multiple tumor types, as necessary, in order to identify the best development path forward.

We expect to see preliminary data from the current Phase II trials in 2004.

Moving now to vaccines.

This is a very exciting time for our vaccines business, with the acquisition of PowderJect and with the advances in our meningococcal pipeline.

Our acquisition of PowderJect, which was completed earlier this week, solidly positions Chiron as the second largest player in the global flu market.

PowderJect is a great strategic fit for Chiron.

Its business complements our vaccines business geographically and provides us with a strong platform to launch new products in the US, especially for our meningococcal vaccines currently in development.

We are off to a quick start with the integration of PowderJect into Chiron.

We have announced our commitment to the formal PowderJect location in Oxford, England.

We have already made our key top-level management appointments, and we are working diligently to bring the operations together quickly and efficiently.

We believe the integration process will be largely completed by the end of this year.

Although it is still early in the integration process, we want to signify our confidence by confirming our previous statements on our pro forma EPS estimate.

The PowderJect acquisition will make a contribution to our performance this year, and after integration expenses, will be EPS neutral or better in 2003, and will be accretive in 2004.

Hence, we are affirming our 2003 pro forma EPS guidance to be towards the upper end of the previously-stated range of between $1.40-$1.50.

Our focus during this phase of the PowderJect integration is on meeting our commitment to customers in delivering flu vaccines on time.

Our goal is to build on the existing reputation for high-quality service that both Chiron and PowderJect have, so as to enhance customer loyalty.

It is critical to meet a market's demands early and reliably, as most flu shots, certainly in the US, take place by the end of the fourth quarter.

Given this timeframe, the summer is hugely important in the flu production cycle, and we are on target to meet our commitments.

The CDC estimates that total vaccine product in the US for the forthcoming season will be about 80-85 million doses, close to the estimated 79 million doses sold in 2002.

There is substantial room for long-term growth in the US market.

As part of its Healthy People 2010 campaign, the CDC has set a goal for increasing flu vaccinations, which could reach 150 million doses in the US by the end of this decade.

Chiron also made good progress in our meningococcal vaccines program in the past quarter.

The market for vaccines to prevent all five primary (indiscernible) types of meningitis is in the $1 billion range.

On the strength of a platform enabled by a growing US presence, our meningococcal program could transform our vaccines business and position Chiron as a credible contender for leadership in the vaccines field.

Enrollment is continuing on a Phase III trial in the US for Menjugate, our conjugate vaccine to prevent men C. This trial will extend the existing substantial safety database for Menjugate to include a US population.

We are on track to complete the Phase III trial and present the data to the FDA next year.

Chiron's combination ACYW vaccine candidate showed a favorable safety and immunogenicity profile in Phase I testing, and we have moved into Phase II trial, from which we expect to see results next year.

Relying on our pioneering research on the meningococcal genome, Chiron is also tackling the development, which is challenging, for a broad coverage men B vaccine.

The multitude of subtypes has made it difficult to develop an effective vaccine from the men B polysaccharide shell.

Data from the Phase I trial for our first generation candidate showed proof of concept, but we believe that our second generation candidate will show stronger immunogenicity.

We plan to enter into Phase I trial with this candidate next year.

Turning now to blood testing.

As we mark the first full year of commercial pricing for the Procleix HIV Hep C assay in the US, we are seeing new advances in the blood testing business.

The business will grow through three main avenues -- new assays, enhanced automation and geographic expansion.

The introduction of Procleix West Nile Virus assays on an investigational use only basis is our most recent achievement.

By July 1, the assay was implemented by all of our customers in the US, representing greater than 80% of the total market.

With our collaborator, Gen-Probe, we were able to develop an assay for a new pathogen threatening the blood supply of the country and bring it the market in a record nine months.

We have trained more than 350 operators from all of our customer sites on the new assay in just six weeks.

We are proud of this accomplishment, and of the added safety this new assay brings to the country's blood supply.

As an indication of just how valuable this assay can be, the very first weekend it was put into use, the Indiana Blood Center detected an infected blood donation that would otherwise have entered the blood supply, making this the first positive donation identified.

Blood banks catching infected samples before they enter the blood supply is crucial.

In high prevalence areas, the rate of donors infected with West Nile Virus can be as high as .2% of the donor population during the peak mosquito season.

This is a figure that far exceeds the prevalence of HIV.

With the introduction of the Procleix West Nile, Chiron will see new revenue from our blood testing business.

These cost recovery revenues from the West Nile assay represent one in a series of milestones for the Procleix franchise in the next few years that could generate new revenue opportunities in the US, Europe and the rest of the world.

The next step will be from Ultrio, which will add a hepatitis B test to the existing tests for HIV and hep C. Ultrio is on track for CE marking by the end of this year, and Chiron expects to roll out a product in Europe at the beginning of 2004.

In the US, we are on track to file an IND and begin clinical trials for Ultrio by the end of this year.

The introduction of Ultrio will also make the Procleix system even more attractive in many Asian markets, where hepatitis B infection is endemic.

All of these steps for Ultrio -- the European market introduction, the IND filing in the US and the penetration into the Asian markets -- will represent significant new opportunities for the blood testing business.

At the same time, we continued to see expansion and increased market penetration of the current duplex assay.

We noted on the last call that we had been awarded 1/3 of the blood testing business in the US.

Since it can take two or more quarters for these centers to come on line, we will start seeing the impact of these new customers in the second half of this year.

Finally, Chiron is working to support its customers as the market continues to move towards individual donor testing, which will provide the highest possible level of sensitivity.

We are seeking CE marking and introducing five new instrument upgrades to enhance the automation of the Procleix system.

These upgrades will be introduced outside of the US first, with filings for 510-K approvals in the US to follow.

I would also like to note another important milestone for blood testing business, which is that earlier this month, the European Commission agreed to a settlement, jointly negotiated by Chiron and Roche, that resolves a complaint about competitive practices brought by 5 European blood banking organizations against our two companies.

We believe that the resolution is a fair one for all of the parties involved.

The agreement recognizes the value of our IP and preserves our current per-donation royalty structure.

We will now be offering licenses to permit home brew testing for blood screening in Europe.

We are grateful to the Commission for its hard work in ensuring this fair and equitable resolution.

Now I would like to turn the call over to David Smith for a discussion of Chiron's financial results.

I will begin with a review of the results for the quarter, which were released today at approximately 1 PM Pacific Daylight Time.

All earnings per share amounts discussed today refer to pro forma diluted per-share earnings.

As we have discussed previously, we present our results on both an as-reported GAAP basis and a pro forma, or non-GAAP, basis.

The adjustments we made this quarter to arrive at pro forma earnings consist of the amortization expense on acquired identifiable and tangible assets related to the PathoGenesis acquisition, the Chiron Behring acquisition, the Pulmaform (ph) acquisition, and discontinued operations associated with the sale of our vision and diagnostics businesses.

The adjustments made in the second quarter of 2002 consisted of the amortization expense on acquired identifiable and tangible assets related to the PathoGenesis acquisition and the Chiron Behring acquisition.

The reconciliation between our GAAP and pro forma results can be found on our website at Chiron.com.

For the second quarter of 2003, Chiron reported pro forma income from continuing operations of 67 million, or 35 cents per share.

This result was approximately 21%higher than the earnings per share of 29 cents reported in Q2 2002.

Total revenues for the second quarter of 2003 increased 17%, to 350 million from 299 million for the same period in 2002.

Product sales increased 16 %, to 246 million from 211 million.

Increases in sales were seen primarily in TOBI, Procleix, Menjugate and pediatric vaccines.

Royalty and other license fees increased 47% to 67 million, driven by increased Betaferon and HCV and HIV product royalties, and license fees from our intellectual property portfolio.

Chiron has substantial global operations which generate approximately half of our revenues outside the United States.

This fact, when coupled with the depreciation of the dollar over the past year, has led to an FX effect on revenues of approximately 8 percentage points.

Gross margins decreased to 60%, from 64% the prior year.

The principal reason for gross margins decline was the FX impact on the vaccines' manufacturing, whose costs are largely Euro-based.

R&D expenses for the second quarter of 2003 totaled 90 million, up 8% from the second quarter of 2002 and in line with our expectations.

The increase principally reflects several programs in the meningococcal franchise that are in Phase II and Phase III.

We are very pleased with the progress of these programs.

SG&A expenses for the second quarter of 2003 totaled 80 million, up 12% from the second quarter of 2002.

As expected, the increase in SG&A reflects continued investment in our businesses.

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

The tax rate decrease, as we explained last quarter, reflects the implementation of several tax planning strategies.

Now I would like to move on to a review of the business unit financial results, starting with our BioPharmaceuticals unit.

Total BioPharmaceuticals product revenues, including Betaferon royalties, were 124 million in the second quarter of 2003, up from 115 million over the year-ago quarter, a 9% increase.

We saw increases in TOBI, Proleukin and Betaseron, including Betaferon royalties.

Our second quarter TOBI sales were 39 million, up 16% from the year-ago period.

This was due primarily to greater product penetration in Europe, increased patient demand and compliance in the United States, and price increases in both the United States and Europe, which are only partially offset by wholesaler ordering patterns.

Second-quarter sales of Proleukin were 29 million, up 7% from the year-ago period, primarily due to price increases.

Second-quarter Betaseron revenues were 48 million, versus 45 million last year.

These revenues, as usual, include the royalty earned from the sale of Betaferon by Schering in Europe.

This is an increase of 6%, primarily due to price increases and higher Betaferon royalties, partially offset by wholesaler ordering patterns resulting from last year's launch of the room temperature stable formulation.

I would now like to take a minute to talk about the financial transition that Betaseron will undergo, principally next year.

As we have previously disclosed in our '34 Act filings, Tier II revenues and Betaferon royalties will decline by 5 percentage points, pursuant to our agreement with Schering.

This will result in a reduction on 2 line items -- product sales and the royalties and license line.

The net effect is a reduction to Chiron's revenues and contribution in 2004.

There are, however, mitigating circumstances and considerations that will somewhat offset this contractual change.

We have been aggressively pursuing plans to expand production capacity for Betaseron to meet growing US demand and our contractual obligations for Europe.

When this capacity becomes operational, we will reduce the need to source product from Behring or Ingleheim (ph) for European and rest of world markets.

In addition, plans are in place to launch a new Betaseron product presentation -- a pre-filled diluent syringe -- in the future.

This product is a convenience-rich, new product presentation that will include a self-contained kit, a product syringe and ancillaries for one dose of Betaseron.

The combination of the pre-filled diluent syringe and the market's first room temperature stable product will make Betaseron one of the most convenient MS products, and will solidify our commercial position in the market.

Despite the financial impact in 2004, the transition to Chiron manufacturer products and a launch of product upgrades with ease-of-use features are important investments to the Betaseron franchise.

Betaseron has performed well in the competitive MS marketplace, and we expect that it will continue to do so.

Gross margins in the BioPharmaceuticals segment decreased to 71%, from last year's gross margins of 72%.

Turning now to vaccines.

In the second quarter of 2003, total product sales for vaccines were 86 million, versus 73 million in the same period last year.

We saw increases primarily in pediatric and the Menjugate vaccines.

Sales of pediatric flu and other vaccines were 49 million in the second quarter of 2003, an increase of 23% from the year-ago period, primarily due to the tender sales of our pediatric vaccines.

Our second quarter Menjugate sales were 14 million, up 39% from the year-ago period.

This increase was primarily driven by winning an Australian tender in the state of New South Wales.

Sales of our travel vaccines, which comprise TBE and rabies, were 23 million in the second quarter, relatively flat from the year-ago period.

The first half of the year is a transitional season for TBE.

Overall, TBE has seen a seasonal increase of 17% year-over-year.

Gross profit for vaccines decreased to 56%, from last year's gross margins of 61%.

Gross margin for the second quarter of 2003 was negatively impacted by foreign exchange rates.

Moving to our third business, blood testing.

Blood testing total revenues -- including product sales, Chiron's share of the earnings of our unconsolidated joint business with Ortho, collaborative agreement revenues and royalty and license fees -- increased to 106 million in the second quarter of 2003, from 77 million in the year-ago period, a 37% increase.

This increase was primarily due to three factors -- Procleix commercial pricing and market share gains in the United States, higher royalty revenue for the use of HCV and HIV intellectual property related to NAT testing, and new license fees for NAT use for plasma fractionation.

Product revenues recognized in the second quarter of 2003 include a full quarter of commercial pricing in United States for Procleix and continued penetration into several markets abroad.

Now, in summary, let me take a moment to highlight our view of the several notable announcements that occurred during the quarter and the financial results for Q2.

We acquired PowderJect, making us the second largest manufacturer of flu vaccines in the world.

This transaction will provide us with a strong platform to launch new products in the United States market, as well as participation in an attractive flu market in the United States.

The European Commission inquiry was fairly resolved, with an agreement that preserves our NAT per donation royalty structure, and that recognizes the value of our intellectual property.

We introduced the Procleix West Nile Virus assay on a cost-recovery basis under an IND in the United States.

We licensed our HIV and HCV technology to Baxter for use in the plasma fractionator market in Europe, our first such license in this new market segment.

Financial results were consistent with our expectations this quarter.

As I have previously mentioned, while foreign exchange rates did affect our top line, we still experienced underlying growth.

Chiron has substantial operations overseas, and as such, is naturally hedged as it relates to FX.

Our earnings per share affected by FX by approximately 1 cent.

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

We are pleased with our growth in operating income over the prior year and over Q1 of this year.

Operating margins were strong, with contributions from all of our businesses.

Earnings per share grew 21% over the prior year, reflecting the opportunities inherent in a growing global and diversified business, validating our business model yet again this quarter.

Taking all of this into consideration, Chiron executed several significant activities during the quarter, while again delivering solid financial results.

From our recent conversations with many of you, I know that you're interested in an update on longer-term guidance.

As Howard stated in his remarks, we believe that PowderJect will make a contribution to Chiron in 2003; however, this contribution will be largely offset by integration-related activities.

We are comfortable that we will be up towards the upper end of our previous guidance for pro forma earnings per share of $1.40-41.50 in 2003.

We have also indicated that we expect PowderJect to be accretive in 2004.

As we usually do, we'll have an update on 2004 and other relevant activities during our Q3 earnings call.

At this point, I will wrap up and turn the call back over to Martin for Q&A.

Before we move on to the Q&A, I would just like to address a statement that was made earlier in opening remarks.

It was said that we had been awarded a third of the US tenders for NAT.

That is to be corrected to a third of the UK tender for NAT blood testing.

We hope to come back and talk about having 80% market share for the UK in the future.

What we have in the US is 80% market share.

Now we will open the call up to questions.

We are joined for the Q&A session by Jack Goldstein, President of Chiron Blood Testing, Carl Pelzel, Senior Vice President of BioPharma Commercial Operations, and Bill Green, Chiron's General Counsel.

Also on the phone we have with us Bruce Scharschmidt, Vice President of Clinical Development, Kevin Bryett, Vice President of Operations for our vaccines business, and as always, the investor relations team will be available after the call to answer questions.

So operator, we'll open the line to questions now.

(CALLER INSTRUCTIONS).

Jennifer Chao with RBC Capital Markets.

With respect to the US flu vaccines market, what percentage of Wyatt's roughly 7-9 million flu shield doses sold in 2002 do you believe Fluvirin (ph) could capture in the 2003 flu season?

And could you give us an update on seeking a label expansion for Fluvirin for the under-4 age group?

Clearly, the withdrawal of the Wyatt products has opened the market up.

We have expanded our production, and we anticipate that we will take a significant part of the space that has been left with Wyatt.

With regard to the pediatric indication, this is something that we are currently evaluating.

As you understand, we are in the very early days of integration, and so this is a project which our R&D people are looking at to expand as rapidly as we can.

Moving over to the blood testing space -- on last quarter's call, there were a number of new blood testing contracts that were cited as being signed during the first quarter but were not reflected due to the 90-120 day lag time for new customers to come in.

Can you give us a sense of what percent of these contracts were actually accounted for here in the second quarter, and how many new contracts were signed in the second quarter?

I'll let Jack Goldstein handle that one.

First of all, as you can see from the numbers, the Procleix sales were up 10% quarter-to-quarter from the first quarter, and they were up 59% from the second quarter 2002.

So we saw significant increases in our revenues.

The second quarter really saw about a half of the customers that we signed up in the US that really came on board during the second quarter, and started to -- where we started to see revenues.

Most of them, and all of the rest of them, came on board with West Nile Virus and started July 1, including West Nile Virus as well as Procleix HIV-1 and 2.

So we will see the results of those customers coming on board for the third quarter.

Jack, did you see a significant number of new contracts in the second quarter that would be, then, reflected in the third quarter?

Most of the second quarter was taken up by contracting with current customers and some new customers for West Nile Virus.

Dennis Harp with Deutsche Bank.

On the PowderJect acquisition, how accretive could it be in 2004?

And then, what has to happen in 2003 for it to be better than neutral?

Let me give a shot at that first, and then I'll kick it over to Howard if he wants to make some comments.

We have said in the past that we believe it will be accretive in 2004, that -- I think we stated that we assume it is somewhere around 10% accretive.

So I don't think we have a different perspective on that.

And as we said, 2003 -- we expect it to make a contribution with some -- largely offset by integration costs, so that's really about all I have that I can add to that particular point.

I'm not sure, Howard, if you have anything you want to add there?

I would just say to Dennis that we appreciate your subtle ways of pinning us down on guidance for 2004 before we are ready, but we're just not ready.

We need to firm up much more on our integration plans.

You have to remember that this whole acquisition, from announcement 'til closure, is done in a matter of less than two months, and this is in contrast to some of these major mergers that you hear about that you see where they take a year to do the planning, and then get regulatory clearance and do the consummation.

So we just don't have enough time to get into the nitty-gritties of the business that we bought.

And as we said in our remarks earlier, our first priority, now that we have had our hands on the PowderJect operation for three days, is just to make sure that we can satisfy the supply and the pre-existing commitments that we have with our customers.

That is our number one priority.

By the time we are done with all of the integration plans, we will be in a far far better position to articulate the elements of the analysis that give you a far crisper answer.

So we beg your indulgence to give us one more quarter.

Fair enough.

If I can ask one follow-up question on TOBI, when does the orphan drug designation expire, and when does the patent that you have on TOBI under which you brought suit against the generic manufacturer,when does that patent expire?

The orphan drug patent on TOBI expires in December 2004, and goes significantly beyond that in both Europe and the United States, 2013.

Eric Schmidt with SG Cowan.

I'm not sure I understood the answer to Dennis' last question.

Is orphan drug in the US would expire in December 2004?

Yes, that's correct.

Can you talk about how many generic ANDA's they were, and who filed them?

Our understanding is that there was one filed by Roxanne, and the FDA gave a tentative approval to that, so that is pending.

And that was the only ANDA filed?

As far as we know.

Howard, if you could just speak broadly -- given this is your first conference call at Chiron -- to your vision of the Company going forward.

Are you a fan of the diversified business model as it stands looking forward?

Are we going to see more acquisitions in the vaccine or diagnostic space than in the therapeutic space, or is therapeutics an area that you want to build up and focus more on?

I would say that my preliminary impressions after some 90 days is extraordinarily positive.

I think this Company is made up of colleagues who have a great deal of drive and energy and enthusiasm.

I am a huge fan of the business model, where we do have diversified businesses, each one of them containing drivers for growth.

I think that is also -- this business model also affords us reliable, consistent financial growth, and that financial growth gives us the financial strength, then, to invest in the range of opportunities -- some of which may very well be from our internal research and development efforts, some of which would be expansion of geographic markets, some of which may very well be acquisitions.

I think you have seen a history of this company doing acquisitions in a sound, wise and thoughtful way.

And to the extent that being sound and being thoughtful and being wise are good things, you should not expect any change.

Thomas Wei (ph) with US Bancorp Piper Jaffray.

I had a couple of questions on PowderJect.

Could you give us an update on the number of flu doses that PowderJect is scheduled to put out there on the US market for the 2003/2004 flu season?

Actually, we are not disclosing what that is for competitive reasons.

Could you talk a little bit about what some of the potential integration costs would be for PowderJect, and will those be accounted for on the P&L in a separate merger-related cost line?

The answer to the second part of that question is no, they will be on each one of the lines as part of the ongoing operations.

So they will be absorbed wherever they are incurred on the P&L.

Examples of those types of activities can be systems-related integration, so ERP systems; you have potentially redundancy payments, and other types of -- those are kind of big hitter items that you might expect to see related to integration.

On Menjugate, the Australian tender -- is there anything left in that particular contract for subsequent quarters?

There's actually, on a backlog basis, about $32 million for Menjugate in total.

There is some portion of that which is related to Australia.

Alex Hittle with AG Edwards.

I'm curious if you could put some numbers or size to the plasma market opportunities that you highlighted with the license from Baxter, and also the European settlement on the home brew tests?

How many tests, roughly, does that amount to in Europe, and are you going to enjoy a royalty that is sort of comparable to what you are getting when these NAT tests are done outside of your firm?

Let me see that if I can answer that.

First of all, talking about plasma -- there are about 15 million units of plasma that are collected in the US, and another 3 or 4 million that are collected in Europe.

A lot of the US plasma is transferred to Europe for production by various companies like Baxter and Aventis, etc., and are tested there instead of here in the US.

Most of the plasma fractionators test many different tests beyond HIV and HCV and HBV.

They test (indiscernible) virus and a few others that I can't think of off the top of my head, and generally use home brew tests.

So we expect that other plasma fractionators in addition to Baxter will eventually become licensees, and we have some ongoing discussions with additional plasma fractionators at this time in order to bring them in line with (technical difficulty).

So I think you get an idea of the total number of tests, and based on the Baxter settlement, some idea of revenues that might be derived from those kinds of agreements.

Your second question related -- sorry, did you want to say something?

No.

With regard to the EU settlement, we believe there are about 5 million home brew units of blood that are tested in Germany and some of the other European countries.

We think that there will be a mixture of certain home brewers in some of these countries taking on licenses.

We think some will be utilizing Procleix assays and some will utilize Roche assays, so without any further speculation, at least we'll at least derive some revenues from either royalties or sales from approximately 5 million additional units over the course of the next 2 quarters.

Any idea when you might get commercial pricing on the West Nile Virus?

What kind of timeframe should we put on that?

We don't really know at this point in time.

We believe that we'll be under an IND for at least approximately two years.

We are working with the FDA as well as the blood banking community to really understand what is happening with West Nile Virus -- the extent of the epidemic this year, and whether or not it is going to be tested after that 2 year period.

Meirav Chovav with UBS.

A little bit more detail on the PowderJect acquisition, in terms of the physical facilities -- could you give us a little bit more detail than that, as well as on the potential cost synergies that you can see?

And another topic also related to Fluvirin -- where are you in terms of the drug delivery version?

Let me take the first part.

The physical facility is principally in (indiscernible), which is outside of Liverpool, England.

It is one of two manufacturing facilities that are certified by the FDA to make products for the US market.

And that is one of the most important pieces of the assets that we acquired in PowderJect.

And one of our highest priorities in the integration effort is to make sure that there is no disturbance to the capability of that manufacturing capability, it's workhorse, it's standards, it's manufacturing capabilities to be able to satisfy the US market.

And that is exactly what we are doing now.

And all of the signs and indications are extremely positive.

Over time, it is possible that we would be able to actually improve both the manufacturing capability, in terms of yield and in terms of perhaps investing further on the total capacity that increased both output and throughput.

The second question I will probably turn over to Kevin.

At the moment, we are very early in the integration.

We are currently looking at exactly where they stand with the delivery system.

I know already, even though we are only three or four days into it, there has been a major meeting over the last two days, reviewing all of the R&D of PowderJect, but I'm not personally aware of the outcome of that meeting.

It's Martin here.

I'm sorry, Meirav.

You asked about some of the synergies.

I think it is important to just highlight that the these action was done -- for for one reason was the complementary nature of the two businesses, in terms of geography.

PowderJect -- strong in Scandinavia, strong in the UK, the US -- places where we're not strong.

The point here is that there are not a lot of synergies to be had, and we had talked about that; and secondly, Kevin also did mention the review and the work that is underway to take a look at the pipeline and clinical development programs.

I'm talking more about in terms of the general and administrative.

Again, I think it is very early, in terms of what we are doing for integration.

As we said, we did this because of what it does for us strategically, what it does in terms of flu in the US market.

We didn't do this deal on a cost synergy basis.

So it's awfully early for us to have a position on what changes we might be seeing there.

Where are you in terms of establishing your own distribution in the US for the flu vaccine?

This flu season is spoken for, and the contracts with distributors (indiscernible) supply houses are signed and in place.

And what we need to do is to contemplate what kind of organizational structure that we establish on the commercial side in the US, and we are going to do that as soon as we get through with the supply of this flu season.

When we have a commercial organization, we are in a far better position to discuss with you just what exactly our plans are and what the financial gains are going to be.

But it is a little premature for us to answer that question, because it would be purely speculative.

One last question has to do with pricing of the flu vaccine for this season.

We are hearing some buzz that pricing had significantly firmed up relative to previous years?

We have heard the same thing, and I think what we are able to say now is that, given the contracts with the distribution channels -- or ones that we have signed, or that PowderJect has signed and we have inherited -- we are not likely to see very much of the, what you call firming up, upside this year.

But it gives us tremendous confidence that which we can make, we can sell.

Operator, I think we are at our hour here, and we will two more questions since we are going a little long here.

Caroline Copithorne with Morgan Stanley.

I had a couple of clarification points, one on the gross margin decline.

I think someone attributed that to foreign exchange impact (indiscernible) vaccines in Europe, but I thought that would have been at least more than offset by revenue FX impact?

So I am just trying to understand that dynamic.

Jack GoldsteinWe did have about an 8 point effect on our revenues overall.

We did, however -- our vaccines manufacturing is almost all offshore.

So from that perspective, the cost of goods sold was substantially affected by that particular action and activity.

So on an overall basis, when you take into consideration the overall effect on the P&L, given the magnitude of our operations offshore, they do offset almost -- nearly 100% to the revenues that we have seen.

One cent is the net effect to the positive that we have.

But the gross margin effect is greater?

But the gross margin effect would be, then, greater -- yes.

Pointing to the high-end of the EPS expectations, is that related to the potential PowderJect impact on 2003, or is that from the ongoing Chiron businesses?

It really is a reflection of our perspective on what we think PowderJect may be able to provide for us, and at the same time, a reflection on Chiron's operations as a whole.

In terms of some of the expectations you've laid out in your recent presentations for the flu market, you mentioned that you don't expect upside to pricing this year.

What are the basic price assumptions that are built into those forecasts that I think reflect -- I think almost about a 50% increase by 2007, or something like that?

We actually haven't been specific about those pricing assumptions, again, for competitive reasons.

This will be our last question.

Elise Wang.

You mentioned that there were some price increases for several products -- TOBI, Proleukin, Betaseron.

Could you tell us what those price increases were and when they were implemented?

And then if you could also put that in the context of some of the comments you made about the offset of those price increases by some wholesaler inventory stocking?

(technical difficulty) early in Q1.

They were, if I recall correctly, 5% for both TOBI and Proleukin, and I believe about 6% for Betaseron.

So that gives you a relative magnitude there.

If you look at particularly Betaseron on a year-over-year basis, Beta was down a little bit.

You have a price increase offset, but what you see is the fact that there was a substantial order, or set of orders from the wholesalers for room temperature formulation products in the second quarter of last year.

So you really see a skew on that.

And if you look at Proleukin, it's a price increase, basically, on a year-over-year basis.

TOBI, we continue to see it -- it's the gold standard; it continues to perform well; demand is good in Europe; demand is doing well in the United States.

Add that with a complement, that with the price increase, you are seeing minimized impact and wholesaler effect.

I think what you can see is the volatility that we have had in the past, based on expectation of prices from the wholesalers, has been diminished substantially, given the efforts that our BioPharmaceuticals group have gone to to tamp down that type of volatility that can occur.

Just wanted to run something by you in terms of what we can expect to see when we model out the way the flu vaccine business may in fact appear on your income statement.

Given the seasonality of the business as I understand it typically -- and do make any comments that you think are appropriate as to what is the correct way of looking at this -- but with the flu vaccines, if I recall, most of the time we will see a pretty big influx and bolus of revenues in the third quarter; and then that is followed with some additional revenues in the fourth quarter.

But this third quarter is typically where we would expect to see the bigger piece of the revenues from the flu vaccine.

And that certainly has been true historically for you all in Europe;

I am assuming that's the same in the US.

Is that the way we should be modeling this business, if we were to take into account the PowderJect business?

The flu business can be a bit quirky and move between Q3 and Q4.

For our own business, we have seen periods -- and you guys have seen it as well -- where we receive a decree in a country on September 30, and the next year we might get it on October 1.

So you can see it shift between the quarters.

From a flu (indiscernible) perspective, there are FDA release requirements, and if everything were released prior to the end of the third quarter, then that would be the quarter you might see that.

But we can't tell whether those releases will happen in Q3 or in Q4.

Which is one of the reasons we don't give quarterly guidance.

Howard's learning.

At this point there would be releases being reviewed by the FDA at this stage, and can you at least comment on what the typical turnaround time is at the FDA?

I really can't.

This is kind of new for all of us in terms of (indiscernible) release timing, so I really can't give you a whole lot of emphasis on one area or another.

I am just going to make a closing comment.

This is my first quarter at Chiron, and to reiterate my answers earlier to Eric's point -- I am hugely impressed with the energy and drive of my Chiron colleagues, and with the progress that we are continuing to make towards our goals.

In this quarter, I have visited numerous Chiron sites and met several of our investors and analysts, and most of my encounters have confirmed my conviction about the extraordinary prospects for Chiron.

I believe that Chiron has numerous attractive opportunities to build upon our very impressive scientific heritage.

The achievements that I have talked to you about this quarter -- the acquisition of PowderJect, the introduction of West Nile assay, the strengthening of our BioPharma leadership team, to name just a few -- underscore our ability to leverage our proven business model to execute on our strategy for growth.

So I look forward to further dialogue with many of you about the progress we are making in expanding our impact on human health worldwide.

Thank you very much.

Thank you for participating in today's Chiron second-quarter 2003 financial results.

You may now disconnect.