Novartis AG (NVS) 2003 Q3 法說會逐字稿

At this time I would like to welcome everyone to Chiron's third quarter 2003 financial results conference call. (OPERATOR INSTRUCTIONS) I would now like to turn the conference over to Mr. Martin Forrest, Vice President of Corporate Communications and Investor Relations.

Please go ahead, sir.

Good afternoon everyone and welcome to Chiron's third quarter 2003 conference call.

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

I'm Martin Forrest from the Corporate Communications and Investor Relations Group.

I and the rest of the team will be available after the call to answer all of your questions.

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

Actual events and performance may differ materially from our expectations.

We refer you to the documents that the Company has filed with the Securities and Exchange Commission, which are available on our website at www.chiron.com.

These include the 2002 10-K Report and the second quarter 10-Q Report.

The third 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 document.

This information identifies important factors that could cause the Company's actual performance to differ from current expectations.

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 third quarter, along with the reconciliation of pro forma to GAAP for prior quarters, is also available on our website.

Consistent with SEC Regulation D (ph) we do not undertake an obligation to update the forward-looking information we're giving today.

Finally, please note that this call is being electronically recorded and is copyrighted by Chiron.

No reproductions, retransmissions, 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.

Good afternoon and thank you all for joining our third quarter earnings call.

Today Chiron announced its third quarter earnings results and provided financial guidance.

In this call I will be addressing earnings, how we are finishing this year and provide our outlook for 2004.

Following me, David Smith will walk you through the numbers in greater detail.

Let me now begin with the quarterly earnings.

Today, we reported third quarter pro forma net income from continuing operations of 60 cents per share, up 30 percent from the same period last year.

All three business units performed well and in particular our vaccines and blood testing businesses experienced exceptional growth.

Following the completion of the PowderJect transaction we recorded our first US flu vaccine revenues and as well we booked our first quarter sales of West Nile virus assay on a cost recovery basis.

These are significant milestones in the growth of these two franchises of Chiron.

Chiron's revenue grew 47 percent in the third quarter over the same period last year, reaching $540 million. (indiscernible) sales for the quarter were $433 million, an increase of 59 percent over the same period last year, largely due to the booking of our first full quarter of US flu sales.

We met our US flu vaccine delivery commitments in time for this year's flu season.

That is only a mere 5.5 month into the consummation of the PowderJect transaction since even our announcement of intent.

We think we're now able to proclaim that this acquisition has all the early signs of success.

Not only in is the integration of PowderJect being executed quickly and efficiently, the other business units are progressing as well.

Blood testing (indiscernible) the West Nile virus assay detecting hundreds of cases of infected blood donations since July the 1st.

We announced the inter-licensing of daptomycin from Cubist Pharmaceuticals, leveraging our sales and distribution network outside of the United States.

I would now like to move on to the financial guidance.

We are re-affirming our projection from mid-year that our 2003 EPS guidance will be at the upper end of the range between $1.40 cents and $1.50.

Our 2003 earnings would be higher, except that we're increasing our level of investment across all three business units.

Of these investments daptomycin is just one example.

The other examples of investment that are high margin and high-growth include the following.

In our vaccines business we are preparing to enter Phase III testing for flu cell culture in Europe, which entails significant investment in manufacturing.

In addition, part of the development in progress for the meningococcal vaccine's franchise is driving the in increase in our R&D spend.

In the blood testing business, we have in investing in the commercial capability to advance our geographic expansion, especially in those markets where NAT testing has not yet been mandated.

We are also investing to increase automation on the current NAT testing platforms so that blood testing canters can test greater volumes of dimensions (ph) on an individual donor basis.

And we're also looking at investment opportunities beyond screening for hepatitis and retroviruses that would expand the blood testing business into the broader realm of blood safety.

In the biopharmaceuticals arena owe are investing in the business and building organizational strength.

We believe strongly that long-term value will be created in this business with judicious selection of investment opportunities and further enhancements of our implementation and execution capability.

Indeed, we have been working hard to bring new energy and focus to this business.

Regarding the implementation capability, we have been steadily strengthening our biopharma management team with the appointment of the fourth Senior Vice President in last year and a half.

The most recent of the additions is Dr. Stephen Dilly, who joins Chiron from Genentech and previously SmithKline Beecham, as the new Head of Biopharma Development.

As many of you have heard before, our development programs are focused in well understood compounds, targeted at diseases with well-characterized populations.

Inhale cyclosporine, daptomycin and dry power tobramycin all fall into this category.

Notwithstanding this focus, we will encounter some disappointment.

This means that we need to make timely decisions on our development plans.

In this context we have a closely examined the available information from our four clinical trials of IL-2 in combination with monoclonal antibodies.

We have established the maximum tolerated testing for liquid IL-2 in our Phase I study of patients with breast cancer and we have stopped patient enrollment.

Because of limited efficacy we have also stopped enrollment in the Phase II study of Proleukin in combination with Rituxan for high-grade lymphoma.

We are continuing to enroll in our Phase II study of patients with low-grade lymphoma who have previously failed Rituxan, and we're continuing our Phase I study of liquid IL-2 in patients with non-Hodgkin's lymphoma.

For these two remaining programs we anticipate data by the end of this year to determine our next steps.

Now let me take a moment or two to outline the basis of our decision to enter into Phase III development with tifacogin, previously known as TIFP , in a new indications of severe community acquired pneumonia.

Recent advances in tissue fracture biology, along with lessons carefully learned from the thorough analysis of tifacogin Phase III trial in severe sepsis that was conducted with a collaboration with Pharmacia, have now given us the confidence to begin this new trial in this new (indiscernible).

In the last few months we have completed negotiations with Pfizer, who, as you know, has acquired Pharmacia.

So Chiron is now in sole control of the destiny of tifacogin.

The unmet medical need for severe community acquired pneumonia is substantial.

More than one million patients are admitted hospitals in the US annually with community acquired amount pneumonia (indiscernible) about a quarter and up in the ICU.

It is this population we're targeting.

Of these patients, approximately 30 percent will die despite appropriate antibiotic therapy and supportive care.

Unlike the sepsis population, these pneumonia patients are well-characterized and tifacogin evaluated in this population represents a good investment opportunity in part because of the homogeneity of the patient population he added.

Moreover, this investment makes commercial sense for Chiron.

In addition to being an area of significant unmet medical need, the prescriber base is relatively small.

Therefore, we can access the potential customer base by leveraging and supplementing resources to our existing oncology and infectious disease sales forces.

We have also assembled an advisory board to gather the input on the trace of the new development path, and indeed to fortify the decision as to whether we should continue tifacogin's development.

Finally, we have just completed a meeting with the FDA on our plan, and I am encouraged by both the substance and the tenor of that meeting.

As we speak Chiron is mobilizing the clinical development and blood supply apparatus.

Assuming we see received agencies final clearance of our protocol proposal by the end of this year, we will aim to enroll our first patients by March or April of 2004.

We're not underestimating the usual risks associated with any Phase III development program.

But I firmly believe that we have sound scientific and commercial rationales to move forward with this trial with a new indication that will address an unmet medical need.

This concludes my discussion of our pipeline advances and the investments that underpin our financial projections.

I would now like to conclude my comments with a discussion of 2004 earnings goals.

We expect 2004 to be a year of solid growth for both the top and the bottom line.

This growth will be driven by strong performance in principal franchises of Chiron (indiscernible).

We expect to see total product sales growth around the mid-teens with total revenue growing at a slightly slower rate due to the reduction in Betaseron royalty.

We aim to achieve 20 percent pro forma EPS growth, inclusive of the investment agenda that I just described.

This will translate into a pro forma EPS number in the range of $1.80 to $1.90.

Without the investment agenda we can obviously achieve a higher rate of short-term growth.

We're confident that we have the opportunities and the capability to create greater long-term value by pursuing a more aggressive investment agenda.

It is a testimony to the strength of the Chiron business model that we can achieve 20 percent growth and fund the significant investments in the business.

Put another way, the engines behind the business model can deliver superior earnings and fund worthy investment opportunities across all three of our businesses.

David will come back to the topic of 2004 guidance after his review of the quarter's financial results.

I'll begin with a review of the results for the quarter which were released today at approximately 1 PM Pacific standard time.

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

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

The adjustments we made to arrive at pro forma earnings consist of a write-off of purchased in-process research and development on acquisitions, amortization expense on acquired identifiable intangible assets on acquisitions and discontinued operations.

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

For the third quarter of 2003 Chiron reported pro forma income from continuing operations of 117 million, or 60 cents per share.

This result was approximately 30 percent higher than the earnings per share of 46 cents reported in Q3 2002.

Total revenues for the third quarter of 2003 increased 47 percent to 540 million from 368 million for the same period in 2002.

Product sales increased 59 percent to 433 million from 272 million, reflecting our acquisition of PowderJect during the quarter.

The continued weakening of the dollar against the euro had a sizable impact on our top line.

Net of foreign exchange, revenues increased 41 percent year-over-year.

Total revenues for PowderJect for the third quarter were 116 million.

Net of PowderJect in foreign exchange, our total revenues increased 10 percent year-over-year.

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

Royalty and other licensed fees increased 38 percent to 66 million, primarily due to increased Betaferon and HCV and HIV product royalties and licensed fees from our intellectual property portfolio.

Revenues from our joint business arrangement with Ortho-Clinical Diagnostics were down, primarily due to lower profits from the US operations.

Collaborative agreement and other revenues were consistent with the third quarter of 2002.

Gross margins decreased to 60 percent from last year's gross margins of 64 percent.

The decrease was largely due to product mix, FX impact and a planned maintenance shutdown.

Research and development expenses for the third quarter of 2003 totaled 98 million, up 19 percent from the third quarter of 2002, and are an indication of our increased level of investment.

The increase primarily related to development of our meningococcal franchise and flu cell culture.

In addition, PowderJect contributed approximately 45 percent of the increase in research and development expenses for the current quarter.

SG&A expenses for the third quarter of 2003 totaled 105 million, as compared to 68 million in the third quarter of 2002.

PowderJect contributed approximately 58 percent of the increase for the current quarter.

Integration related expenses were 7 million in the third quarter, approximately a quarter of our total expected integration expenses.

We expect that we will see an additional integration expenses through mid 2004.

The increase in SG&A was also driven by additional costs associated with ongoing marketing programs to support the continued growth of our business, as well as corporate initiatives.

Our estimated full-year effective tax rate is 25 percent.

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 126 million in the third quarter of 2003, up from 115 million over the year ago quarter, a 9 percent increase.

We saw increases for Betaseron, including Betaferon royalties and for TOBI, partially offset by the decline in Proleukin.

Third quarter sales of Betaseron, including the royalty earned from the sale of Betaferon by Schering in Europe, were 45 million versus 38 million last year, an increase of 18 percent, primarily due to price increases, increased patient demand and Betaferon royalties, offset by wholesale ordering patterns.

TOBI performed well, with third quarter sales of 43 million, up 10 percent from the year ago period, largely due to the progress of TOBI across Europe and price increases, offset by wholesale ordering patterns.

Third quarter sales of Proleukin were 30 million, down 7 percent from the year ago period, mostly as a result of wholesale ordering patterns, offset by price increases.

Gross margins in the biopharmaceuticals segment decreased to 74 percent from last year's gross margins of 77 percent.

The decrease was primarily the result of a planned annual maintenance shutdown and product startup costs for the recently approved Betaseron daily once syringe.

Turning now to vaccines, we saw excellent results in vaccines this quarter, confirming the value of our purchase of PowderJect.

In the third quarter of 2003 total product revenues for the vaccines business were 263 million versus 125 million in the same period last year.

PowderJect product revenues were 114 million in the current quarter.

In addition we saw increases primarily in flu, Menjugate, pediatric and other vaccines, which were offset by a decline in travel vaccines.

Total flu sales for the third quarter increased 174 percent to 183 million over the prior year period.

Fluvirin sales were 103 million for the quarter, while the rest of Chiron ex-US flu vaccine sales were 80 million for the quarter.

This came as a result of recorded one full quarter of Fluvirin sales during the quarter.

Looking at the entire flu season, which spans the third and fourth quarters, we expect that worldwide pro forma flu sales will be approximately 40 percent over the prior year.

Menjugate performed well in the third quarter, mostly as a result of sales to Australia, Spain and France.

Menjugate sales were 11 million, up 72 percent from the year ago period.

Sales of all other vaccines were 69 million in the third quarter of 2003, an increase of 31 percent from the year ago period.

The increase was driven largely by tender sales of our pediatric vaccines and increased sales following our acquisition of PowderJect, slightly offset by the seasonality in the travel vaccines portfolio.

Moving to our third business, blood testing, with the introduction of the West Nile virus assay, blood testing saw strong growth in the quarter.

Blood testing total revenues including product sales, Chiron's share of the revenues from our joint business arrangement with Ortho, collaborative agreement revenues and royalty and license fees, increased to 109 million in the third quarter of 2003 from 89 million in the year ago period, a 22 percent increase.

Driving this growth was the Procleix West Nile virus assay -- available on an investigational use only basis in United States, market share gains in the US for product sales of Procleix and continued penetration into several markets abroad.

Also contributing to the increase was higher royalty revenue for the use of HCV and HIV intellectual property related to NAT testing.

Offsetting the gains were lower revenues from our joint business arrangement, particularly due to lower profits from the United States operations.

In summary, the third quarter illustrated the ability to deliver the power of our business model.

Let me take a moment to highlight several notable announcements from the quarter and the financial results for Q3.

Our acquisition of PowderJect has allowed us to access the increasingly attractive US flu market, and at the same time acquire a commercial platform that will allow us to launch new products in United States.

We acquired international development and commercialization rights for Cubist, daptomycin antibiotic.

Revenues were particularly strong, with product revenues of 59 percent and total revenues up 47 percent, reflecting growth in all three of our business units.

Financial results for the quarter were consistent with our expectations.

PowderJect accelerated the growth of our top line from 15 percent for the base business to 47 percent.

Net of FX our revenues increased 41 percent over the year.

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

EPS grew 30 percent over the prior year, reflecting the opportunities inherent in a growing global and diversified business.

While foreign exchange 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.

FX increased our EPS by approximately to send this quarter.

Taking all of this into consideration, Chiron executed significant activities during the quarter, not the least of which has been the very successful progress in the PowderJect integration.

While delivering solid financial results.

Now I like to turn ahead and look at 2004.

As Howard mentioned, we expect 2004 will be a year of solid growth, both for the top line and the bottom line.

We expect product sales to reach between 1.5 and 1.6 billion and total revenues to achieve between 1.9 to 2 billion.

Gross margins are expected to equivalent to or slightly lower than 2003 levels, while operating expenses will increase by approximately 10 percent over 2003 spending levels.

We expect our tax rate to be equivalent to or slightly higher than the current tax rate.

As a result of all of the above, we expect our pro forma EPS to be in the range of $1.80 to $1.90.

To amplify what I just mentioned, we expect growth rates for 2004 for total product sales to be around the mid-teens and total revenues to grow at a slightly slower rate.

In biopharma we expect mid single digit growth in sales in our oncology and infectious disease franchises to be offset by the reduction in Betaseron and Betaferon revenues.

In vaccines, we expect to see sales growth in the mid-teens for both flu and the remaining three product groups combined.

For flu the main revenue growth driver will be greater participation in the US flu market as a result of increasing manufacturing capacity beyond 2003 levels and modest price increases.

In blood testing we are expecting to see the whole franchise grow in the mid-teens.

Naturally NAT product sales will be growing at a substantially faster rate, reflecting the following drivers -- penetration of the Procleix system in new international markets; commercial revenues from the ultra assay (ph) from certain European and Pacific Rim markets; and a whole year of cost recovery revenue from the West Nile virus assay in the United States.

We believe that total royalties will grow in the mid single digits and royalties excluding Betaferon royalties can grow in the high teens.

Excluding Betaferon royalties, royalty revenue growth will be driven by immunodiagnostics and molecular diagnostic testing and blood screening and plasma testing market segments.

Growth will obviously not be consistent with each quarter.

Our vaccines business is seasonal, with travel vaccine revenues booked primarily in the first and second quarters and flu vaccine revenues recorded in the third and fourth quarters.

Accordingly, our bottom line growth in the first half of the year will be modest and the exhilaration will pick up with the third quarter.

In summary, Chiron will deliver at or above its growth goals next year while investing across our businesses for long-term value creation.

The accretion of the PowderJect acquisition, along with organic growth of the business has input into an enhanced investment agenda that includes new geographies, new capacities and new products.

And with a new enhanced investment agenda we project 2004 to be another year in which Chiron's unique business model continues to build a sustainable and compelling growth platform.

With that I will turn call back to you, Martin.

That concludes our prepared remarks.

Now I would like to open up the call for questions.

To help us respond to all questions in the queue, please refrain from asking multi-part questions.

If you have additional questions, we ask that you re-enter the queue with your follow on questions.

For Q&A we're joined by some additional people -- Jack Goldstein, the President of our Chiron blood testing business;

Craig Wheeler, President of Chiron biopharmaceuticals;

Stephen Dilly, Senior Vice President of biopharma strategy and development;

Bruce Scharschmidt, Vice President of biopharma clinical development.

Joining us by phone is John Lambert, President of Chiron vaccine, and Kevin Bryett, Vice President of Commercial Operations for vaccines.

We will now take some Q&A.

(OPERATOR INSTRUCTIONS) Dennis Harp, Deutsche Bank.

Congratulations on a great quarter.

I wanted to understand the flu vaccine business a little bit better.

Howard, you mentioned in your prepared remarks that you met all of your commitments in the third quarter.

So I take it what we would see in the fourth quarter, or perhaps in the first quarter, would be sort of driven by market dynamics.

And what are the drivers that would drive sales of the flu vaccine in the fourth quarter?

How much do you have of your 2003 capacity remaining to sell?

And then how much does capacity grow in 2004?

John Lambert will join me in supplementing the answers I will give.

We have previously projected that in 2003 we will be able to make more than 40 million doses of flu vaccine for the US market.

As we speak, we believe that that goal will be met.

In the third quarter we believe that approximately half of those doses have been shipped.

We believe that the remaining half of those doses will be shipped in the fourth quarter.

The dynamics of the market is dominated by the (indiscernible) market since last year.

Our early indications, the conventional vaccines are still taking (indiscernible) volume and is the result of what we think is a supply-side demand-side imbalance.

We think that all the conventional vaccines that have been made and that will have been shipped into the market will indeed be sold and largely used.

We're not in a position to project too far into the future, but certainly the 2003 flu season looks every bit consistent to our expectation when we made a decision to acquire PowderJect 5.5 months ago.

John, would you want to say anything?

That's perfect, Howard.

We're in a position both with the PowderJect product and the ex-Chiron flu vaccines that we've sold off -- actually committed to sell every dose that we've produced this year.

What about next year?

How much will your capacity grow?

We expect to see an increase in capacity out of Fluvirin.

But we're not in a position to confirm a percentage increase.

There will be an increase next year.

May-Kin Ho, Goldman Sachs.

Can you tell me what doses are you thinking of using with TIFP?

And what is the pattern life left on this?

We're going to take forward two doses into our Phase III program using what is usually called a "pick the winner design".

We need to be sure that we're on the plateau of the does response curve, so we're looking at two infusion rates -- .025 and .075.

There are several patents covering the compounds.

The patent expired the next decade for the compounds.

How big a study do you envision?

We're looking at a (indiscernible) study.

What we discussed with the FDA was a study design which would give us at least 700 patients in our database at the dose we choose to take to completion in the study.

Thank you.

Mark Augustine, Credit Suisse First Boston.

I just wanted a clarification on the comment that was made in the prepared remarks regarding a 40 percent increase in;

I think it was worldwide sales of flu vaccines over '02.

I just couldn't make that math work.

Maybe you can clarify that and help me out.

We talked about at the point of acquisition with PowderJect that we had pro forma revenues related to flu on a worldwide basis of about 240 million or so, and taking into consideration 150 million from PowderJect about 90 million for us last year.

So we're assuming that we've got a 40 percent uplift, which would take you to somewhere around 330 million as it relates to flu next year.

Next year or --?

Sorry, I meant this year -- 2003.

One quick one TIFP study.

I know that you don't have a protocol (ph) agreement yet, but what are you hopeful is the primary efficacy end point of this study?

It's going to be a survival study.

And the primary efficacy end point will be survival for 28 days.

We will be collecting some data for a more prolonged period than that, but that's the primary end point.

Thanks very much.

Mike Keane, Banc of America.

My question is about the guidance.

Clearly the number that you reported here for the third quarter is annualizing out at a number well over $2.

I understand the need to spend to support your current programs, but I'm just wondering why such a conservative guidance for '04 raw (ph) EPS?

Let me address that for you.

We're addressing $1.50.

If we didn't have investment, we didn't have integration expenses, we didn't have things like that we would obviously be higher than that.

If you take a look at how things play out, integration expenses were about 7 million in this quarter, and we said that's about a quarter of what we expect the total to be.

My belief is Q4 integration expenses will be higher.

We will see some go into 2004, but we will see increased integration expense in the fourth quarter.

At the same time, something that largely goes unnoticed for some folks is the fair value adjustment you need to do to inventories.

When you do purchase accounting you have to write up the value of your inventory.

That has the effect of depressing your margins, and that has a depression on your bottom line.

That's not insignificant as it relates to this particular activity.

If you look at the investments that we're making, daptomycin is one example of something and that is a charge that we'll take in the fourth quarter.

Again, it's not insignificant in terms of what the effect is on earnings per share.

So you look at that, the ramp up with TIFP, increases as we're looking forward in terms of Menjugate and its clinical trials, and then ACYW activity is going on in the businesses and blood testing, you can dial into a number that is closer to what we're suggesting.

Going forward into 2004, clearly if we were not pursuing an enhanced investment agenda, we would be significantly higher than the range that we're showing.

But again, one of the things that PowderJect does cover is the step down as it relates to Betaseron -- and that isn't insignificant; we talked about that in the past -- TIFP investment and the opportunities that we're pursuing internally, as well as potential external opportunities, which gives us that basis to return the growth goal in that 20 plus percent range that we've been talking about and continue to invest for the future.

If I could just add, we have already said this; we don't know how to make it any more obvious.

Daptomycin marks our clear intent to acquire products that fit neatly into our strategy.

And we have said already that we have a clear strategic objective in our blood testing business to advance our realm into blood safety overall.

So in due course you will see the clear manifestation of the investment agenda beyond the ones we have already outlined.

Could you just tell me what the integration expenses will go towards and how you decide whether to take and in-process charge for those rather than expense them through your income statement?

Integration expenses are those things that are related to redundancies, consulting related expenses around integration, around systems, tax planning, things of that nature.

Those are the big drivers in terms of what we've seen and what we will continue to see.

None of those are eligible for an in-process charge, which is a onetime charge.

In-process charge you're dealing with technologies versus, let's say, operational activities.

And will you make it transparent to investors what those charges are relative to sort of expenses for the normal parts of business?

That is what we've done this time in terms of breaking out, I believe, from SG&A that there were $7 million of integration charges.

We will continue to report out on what integration related expense is until it becomes something that's immaterial.

Thanks very much.

Thomas Wei, Piper Jaffray.

I had a couple of questions on flu.

I guess the 40 percent number that you're talking about, can give us a sense as to what the contribution of price versus volume is?

And if it's mostly volume, is that pretty consistent between the US or the PowderJect business and your base business?

John, would you like to take a crack at that?

On that one it is primarily volume because although we've seen increases in the end market prices in the US, PowderJect had original contracts in place, already set contracts, with its distribution network.

So most of the increase you see is in volume.

In the US the PowderJect business versus your base business, are the volume gains similar or is it mostly in PowderJect?

It's mainly in PowderJect with some modest increases in the Chiron business.

Alex Hittle, A.G. Edwards.

A very nice quarter here.

I'm curious on the expenses that you're going to take here for the Cubist, you're going to buy 18 million worth of converts or maybe you already have -- I am sorry, restricted stock.

Is that going to be flat-out expense going through your income statement next quarter?

Actually there's $18 million we talked about.

There's a component of which is a license fee and then there's a component of which were purchased securities at a premium.

So the premium obviously gets expensed and then the license fee gets expensed as well.

So we didn't purchase any type of convertible instrument in this.

If I may jump and go off that topic for a second.

When you talked about blood safety overall, could you explain more specifically what that means?

We're looking to make investment in a number of areas in blood testing, some within the net lab (ph) that will occur (technical difficulty), some in other testing laboratories in blood donor centers and then a third area is in the processing centers in blood centers which are beyond our current reach.

So those are the three areas that we're looking to make investment in.

Does this become more of an equipment business?

Not at all.

All of these opportunities are more reagent types of opportunities, some of them with lasers and razors blades.

Thank you.

Eric Ende, Merrill Lynch.

Thanks for taking my question.

I'm just trying to reconcile the guidance that you're giving.

It sounds like you're giving items for 25 cents in the fourth quarter, which would imply just a huge amount of spending.

Included within that spending, I guess you're including these integration expenses as well as the write up of inventory as well?

Yes that's --

I am just trying to get a sense really as to how much of it is R&D and SG&A?

We are taking into consideration the integration expenses, as well as the inventory valuation.

Also, as we talked about, the Cubist related expenses will hit in that particular realm as well.

Also take into consideration that this is the first quarter that we have the reduction in Betaseron to factor into that particular equation, plus TIFP.

It's a little difficult for me off the top of my head to do kind of a split between what you might characterize as the onetime expenses and the ongoing expenses at this point.

So we shouldn't use the fourth quarter numbers really as a run rate going into '04?

I think we talked about being up 10 percent.

If you take a look at an enhanced agenda, working with TIFP and all that, it's probably a bit difficult to call what an effective run rate might be off of a fourth quarter.

I think you probably have to take a look and see what you think at the end of the year to gauge that.

The next question has to do with the tax rate.

You said tax rates should be about equal or a little bit greater than what we saw in '03.

Given the fact that the US profits should increase because of Fluvirin, I'm just trying to understand how the tax rate is going to stay kind of flattish.

Having a global footprint as we do in our business allows for us to have more of a pharmaceutical-like tax opportunity and tax planning.

The PowderJect profits are actually domiciled in the United Kingdom.

They're not domiciled in the United States.

The reason that we're suggesting that there is a chance you may see a tick up is that there is profits associated with PowderJect.

We have a series of in initiatives on going to take a look at what type of tax planning we might be able to do in order to keep ourselves at or close to the rate that we have currently.

One final quick question.

How much visibility do you really have on your spending in '04 given that you're really just pulling together your team on the biopharma business?

Actually, we've been sweating those guys pretty hard.

I think we've got very good visibility.

These guys are not new to this business.

They have come in, studied very quickly and have come up with, I believe, very sensible recommendations for where we ought to be going next year, both in programs and in spend.

Thanks a lot.

Jennifer Chau, RBC Capital Markets.

Thanks and congratulations on a very strong quarter.

Just going back to FluMist, what percent of the gap left Wyeth's FluShield due to their exiting the market this year do you estimate could be picked out by Fluvirin this season?

Could you just clarify for us also what the expectation going into the PJP acquisition was on the total doses to be potentially sold from all three players this year?

And the maybe just a little bit of color on how fast you think the US flu market is growing.

When we purchased PowderJect, we knew that PowderJect's capacity was in the low to mid 30s.

We know the reason to do the transaction in for the US market.

We knew, of course, Wyeth was out.

What we didn't know at the time was whether or not indeed we can get the supply up from mid to low 30s to a number higher, and that, I believe as I said before, we can get it to the low '40s range.

We didn't know, of course also, what was going to happen the FluMist, and you probably know a great deal more than we do about the performance of FluMist, and we've all been learning from the experience.

And there's a tremendous of amount of dynamic in that marketplace that we're all trying to figure out.

And preliminary I think it's difficult for us to forecast what FluMist is going to do in 2004.

We do believe that FluMist will not take up a dominant market share, even with all of its convenience features; so I'm giving the preliminary indications of this uptake in 2003.

We believe that it will still be a general imbalance, although I think we can come fairly close if we succeed an increase in our volume at the rate that we're currently forecasting for 2004 from 2003.

I think we can come awfully close.

Of course, we have no idea what Aventis is going to be able to do in 2004, so it would be imprudent for us to give that.

So just for maybe clarification around that, in terms of your capacity supply for this year, were you able to at least flex that into a competitive manner vis-a-vis Aventis this year?

Could you maybe quantify what portion of the flu shield market you were able to get?

John, you may have something to add to that at this point, but I think it's difficult for us to say.

Of course, the dynamic of the US flu market for the most part is the relationship with physician supply houses and vaccine supply houses and whether or not they feel that you can honor the contract supply agreement with them, and therefore how aggressive they're going to be in pushing the vaccines into physicians' offices.

And I think the (indiscernible) we were able to get into the market early and honor our commitments in the way that is suitable for the physicians for our channels, I think had a great deal to do with our success and our sense of general optimism.

Maybe lastly, can you give us a sense of what your underlying assumptions were on the US flu market growth for next year?

John, do you want to try and address that?

Just one point of clarification.

Wyeth has been out of the market for a couple of years now.

The US flu market is very much driven by the CDC recommendations for flu.

If you look at these, they are showing an increase over the years.

This is how we see the market going.

Thanks a lot.

Tom Shrader, Harris Nesbitt Gerard.

Thanks for taking my question.

Can you tell us in the third quarter what fraction of US blood was tested for West Nile?

100 percent of all blood in the United States for transfusion was tested for West Nile virus since July 1st.

We, of course, have an over 80 percent share, so over 80 percent of the blood was tested with Procleix.

Are you willing to break out cost recovery royalties?

Or is that too personal question?

We have not disclosed cost recovery price.

I can say from the numbers that we had an excellent quarter.

We grew 17 percent from the second quarter and that was fueled mostly by West Nile virus, but in addition market share gains in the United States, Italy and Spain.

And actually the delta of the second quarter to third quarter was offset by onetime instrument sales for West Nile virus in the second quarter.

So we had a very good quarter.

Can I asked one -- on the TIFP trial, what fraction of the patients that died from serious CAP go through some sort of serious sepsis first?

That's quite complicated question because the intersection between pneumonia and sepsis is a complicated story.

What we can say is we're looking at something around a quarter of the patients with severe community acquired pneumonia end up in the ICU.

The mortality rate in that population historically is somewhere in the high 20 to low 30 percent.

The whole point about this trial is we're trying to catch the patients before they become moribund with sepsis cases so that we have a clear opportunity for the drug to shoe efficacy.

So it's kind of a cleaner pre-sepsis trial?

Absolutely right.

And the whole point about that is we're trying to define well-characterized homogeneous population to give the drug to best chance of showing efficacy.

What fraction of people die from something completely unrelated to sepsis?

Essentially, what do you think the noise is in this trial, the mortality rate that you don't have an effect on?

We believe that if you're in the ICU with severe community acquired pneumonia that's the real and present threat and that's the thing that you are likely to die from.

So we believe from historical data in that indication, and also the (indiscernible) of this drug, that we have plenty of opportunity to show (indiscernible).

So we're not concerned about confirming variables like that.

Thanks a lot.

Geoffrey Porges, Sanford Bernstein.

Congratulations on a great quarter.

I will ask my allotment of four questions right now.

Particularly on the vaccine business, could you give me a sense of when you expect to get the infinite (ph) label from six-month to five years of age that would allow you to compete with Aventis in that newly recommended population?

Secondly, just a little bit more color on the price increases.

I know you've take a list price increase but I'm curious about what you think the realized price increase is likely to be next year, given the prices the list price increase and then rolling that into the contract.

And then finally, when can we expect meaningful use on ACYW?

We will let Bruce try the first one and John, why don't you follow up with the second.

The couple of questions pertaining to the vaccine setup (ph) pipeline, the ACYW Phase II trial has completed enrollment, so 100 subjects are enrolled.

And we can expect a read out in that in the first half of next year.

There was also a questions pertaining to label expansion for (indiscernible).

That's something that is currently in evaluation stage.

I don't think we would be prepared to comment on timing at this point.

Thanks.

(indiscernible) we said the market price has gone up by 15 percent this year, and as I mentioned we have fixed prices to our distributors.

Those agreements in fact continue into next year.

In all of our modeling we've assumed a fairly modest price increase for flu for next year with end market price, but we don't really reap the benefit of that next year.

On an ACWY, I would go back to Bruce on that one.

Bruce answered that question.

John, just on the list price increase, can you give us a sense as what percentage of your contracts actually come up for renewal and whether you will be able to realize the price increase next year?

Next year, no.

Okay, thanks.

Craig Parker, Lehman Brothers.

First quick question, I just want to make sure I understood a statement earlier that there was 10 percent growth in the non-influenza part of the business.

And then the comment about 7 present currency effect, did that pertain to just the non-influenza part of the business or everything?

The FX affect that we talked about pertains to the entirety of Chiron's business.

So given that most of the increased sales were in the US, can I assume that there was something like 6 percent effect on the non-influenza business, and therefore something like 4 percent growth in local currency of the non-influenza business?

Probably something like that is not out of line, yes.

I also have a question with the rationale for the CAP study.

I assume that there was some analysis of the subset of patients who met the ATS definition for severe community acquired pneumonia.

Was that a prospectively defined subset?

And can you tell me what sort of patient numbers there were in that subset?

We did analyze that subset from 007 (ph), which was the previous (indiscernible) study.

That was not our only piece of data to lead us to the conclusion that the CAP was a valid place to go.

It was one of many analyses.

They were exploratory analyses.

This was not a prospectively defined analysis, therefore it was exploration of the data and it had to be taken in the context of other understanding of the pathway.

We learned a lot of things from analyzing previous studies.

One of them was an interaction with heparin.

One was about the definition of the population, all of which have been factored into the final design of the next study that we're going to do in CAP.

Maybe I can follow up off-line about the homogeneous population because my understanding was it was things like baseline alcohol use had quite an effect on survival risk.

But I will just follow up later.

I think we will take one more question.

Caroline Copithorne, Morgan Stanley.

I wanted some more clarification on the guidance.

I'm not sure I understood some of the '04 guidance numbers, such as those that were used in the comparison, like the 10 percent increase operating expense over '03.

What number are we supposed be using for '03 -- PowderJect just for the combined period was actually combined or a pro forma basis and all these additional expenses?

I just want to know what some of those comparisons are.

Unfortunately I think some of the comparisons are a bit difficult.

I would look at the second half of the year before I look at the full-year from a run rate basis.

We didn't do PowderJect for cost synergies.

There will be some things that will change over time.

But the big drivers in the increase are obviously TIFP and advancing the programs.

So it's something second half of the yearish; if you wanted to do a full-year comparison off of 2003, something like that.

What did you use when you calculated this 10 percent increase in '04 versus the prior year?

I used the budget.

I have the advantage of full knowledge (indiscernible).

But if we use the second half, like last six months of 2003, annualize it and then assumed 10 percent over that?

I haven't done that math to be able to tell you that.

I can say that I wouldn't be using the first half of the year because the level of spend was a bit lower.

But you have given all the -- spending 10 percent sound like a really low increase.

It can be between -- again we're talking (indiscernible) operating expenses as well.

It could be that R&D spend will go up higher and SG&A spend will be lower, so we have given you kind of an overall operating expense number in terms of the projections for next year.

On the blood testing business, can you just walk through where in the developing country markets -- I assume they're all fully penetrated with the existing products -- but what the penetration rate market share is and where the timeliness for stepping up the pricing based on new test added is?

Are you talking specifically about Asia?

No, in the developed markets, so US, Europe, Japan.

I guess it's up to you to pick the market.

The developed markets represent about 54 million units of blood.

And of that 54 million units, about 8 percent is homebrew and about a third is unpenetrated, whether or not they are doing serological tests but they're not doing any NAT testing right now.

And the market share is split outside the US is what?

I don't have those numbers off the top.

When we looked at market share on a worldwide basis, we believe that in that 54 million number that we have about 33 percent market share worldwide and our main competitor has about 31 percent worldwide share, and then the rest is, as I said, homebrew or unpenetrated.

So how much of your growth do you expect to come from new markets versus market share gains versus products line extensions in new tests?

Not to give you the exact figures, but next year we are expecting increases in product revenues to come from the introduction of Ultrio in Europe and Asia, penetration into new markets in Asia and full-year effect of West Nile virus in United States.

Those are the three drivers of our growth for 2004.

Thank you.

That concludes our Q&A period.

I would now like to turn the call back to Howard for our closing remarks.

This quarter Chiron continued to deliver the kind of solid financial growth that are the hallmark of the Company.

The PowderJect acquisition has already proven to be an excellent addition to our vaccines business and to the Company as a whole.

The revenues that we are driving from our growing business in vaccines and in blood testing allow us to reinvest in the Company so that we will be able to enhance shareholders' value even further for the long run.

We see 2004 as a year when we will continue to execute on our strategy to develop all three business units further by delivering the same financial results that you have come to expect from us.

We look forward to continuing to talk to you about the progress we're making in the months to come.

Thank you very much for joining us this afternoon.

This concludes Chiron's third quarter 2003 financial results conference call.

You may now disconnect.