Novartis AG (NVS) 2004 Q2 法說會逐字稿

Good afternoon.

My name is Tracy and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the Chiron second-quarter 2004 financial results conference call.

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

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

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

If you would like to withdraw your question press star and the number two on your telephone keypad.

Thank you.

I would like to turn conference over to Martin Forrest, Vice President of Corporate Communications.

Please go ahead, sir.

Thank you, Tracy.

Good afternoon, everyone, welcome to Chiron's second-quarter 2004 conference call.

On behalf of the Chiron team, I would like to introduce to you our principal speakers.

Howard Pien, Chiron CEO and President and David Smith, Chiron's CFO.

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

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

Before I turn the call over to Howard for his discussion of Chiron's results, I would like to remind you that the remarks will contain 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 documents that the Company has filed with the Securities and Exchange Commission including our most recent 10-K and 10-Q for discussion of important factors that could cause the Company's actual performance to differ from those expressed or implied in today's remarks.

We do not undertake any obligations to update the forward-looking information we are giving today.

Please note that where we indicate a number to be pro forma in today's discussion, 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, and on our web site in the investor section under financial reports.

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

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

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

Thanks, Martin.

Good afternoon and welcome to our call.

Today Chiron announced our second-quarter earnings results, and in this call I will talk to you about the progress we have made over the past quarter and provide you with a preview of the progresses that we intend to achieve in the quarters to come.

We believe that a picture of Chiron as a successful and vibrant company will continue to be enhanced.

Let me begin by briefly highlighting our Analyst Day held in New York a few weeks back.

We described in some detail Chiron's strategy for value creation and our plans for turning that strategy into results.

We thank everyone who attended either in person or via webcast.

We are especially grateful to the many of you who gave us pieces of feedback on how we have progressed and how we should progress further in obtaining our goals.

On the Analyst Day, we outlined four themes for value creation, and briefly they are, first, acquiring adjacent technologies that complement our existing strength, parenthetically the Sagres acquisition announced since Analyst Day is an example of this theme.

Second, leveraging our platforms, products and skills into new geographies.

Parenthetically the PowderJect Acquisition to enter the U.S. market exemplified the theme, and I will have some remarks on the upcoming flu season in a few minutes.

And third, taking calculated risks that have the potential to pay great rewards.

And finally, fourth, implementation, that is advancing our strategy through consistent execution.

The Analyst Day was also the opportunity for us to disclose some specific information on several important programs.

Along with our partner Sun Quest we provided the aligns of the registration plan for the technology and in the system that will convert type A and type B and type AB red blood cells to universal donor type O. We also disclosed the preliminary findings from our Phase II meningitis ACWY Vaccine study, that suggested the heightened prospect that we will have efficacy in toddlers and the older age groups.

We also showed the pharmacokinetic and target modulation data for Chiron 258, the gross oxykinaise inhibiter that gives us increased confidence that we will have a very promising candidate for a wide range of cancers.

And in a month, since the Analyst Day, we have seen additional progress.

Our Blood Testing business has continued to demonstrate our ability to execute on the geographic expansion theme.

The first phase of our marketing approach will be Procleix Ultrio Assay is to convert at least 30% of our insolvates particularly in the 7 European countries as quickly as we can.

We are moving toward that goal with 13 customers in four major European countries having signed on in Italy, in Germany, in Spain, and in Portugal.

Vaccines has also made -- marked the milestone in the past month with the start of a poly immunization program for the MeNB vaccine in New Zealand.

The program, which will initially target the area of the highest prevalence of MeNB is aimed at more than 1 million children and young adults age 6 months to 20 years, 1/5 of the country's population, demonstrating the potential impact of a MeNB Vaccine to address a significant public health challenge.

Let me now turn to the flu vaccine business in the U.S.

As you know, last season, flu vaccination rates in the U.S. hit a record level.

The flu season began early and hit hard.

As a result, Americans saw protection from flu vaccines at an unprecedented rate with 80 million doses sold in total.

More people were vaccinated than ever before, a major public health milestone.

That number is an important step toward the CDC's goal of 150 million people receiving flu vaccinations by the yar 2010.

And because of the heightened awareness from last year's flu season, we believe that the upcoming season will generate strong interest, people increasingly recognize the value of vaccination in preventing influenza and its attendant, very serious complications.

This is true not only for those individuals who wish to avoid the flu themselves, but also for those who have regular contact with small children, with the elderly, or with other high-risk groups and who wish to reduce the chances of transmitting infection to these groups.

This month marks the one-year anniversary of the completion of our acquisition of [HadOject].

In this year we have made great strides toward enhancing the value of the opportunities that are represented by the flu vaccine business.

Based on the experience over the past three months of manufacturing this season's vaccine, we now project we can exceed a total output by about 8% relative to our previous expectation.

We had previously expected that we would produce 50 million doses of Fluviron,of which about 48 million doses would be shipped to the U.S.

We now anticipate that for the U.S., we can deliver 50 million doses of Fluviron during the season, and furthermore we expect to produce another 2 million doses for CDC stockpile at the end of the season.

This will allow the CDC to prepare for the possibility of another dramatic flu season.

For Chiron, all of this would represent an increase of about one-third in the number of doses over last year's production.

This flu season will also mark the inauguration of our direct marketing capability in the U.S. vaccine business.

Our strategy is to move towards a blend of sales capability, both throughout distributors and through our own direct marketing.

In an effort to increase our flexibility on the commercialization of Fluviron.

Our intent is to work largely with distributors with whom we have built a great success.

At the same time, our own direct marketing capability will allow us to develop the niche market segment, including selected states, some pharmacy chains, and the CDC, thereby capturing an increase in margin.

While we have orders for the entirety of our 2004 projected supply, all but one of the contracts with distributors for PowderJect will expire at the end of this season.

So, we have begun to negotiate new contracts.

Negotiations are going well.

We expect that we will have new contracts finalized by this fall and these contracts will bear prices that will be higher than those in the expiring ones.

Striving to fill the responsibility of a vaccine manufacturer as a corporate citizen, we have been active in the multilateral effort to prepare for emerging influenza pandemic threats.

In May, we won a contract from the National Institute of Allergy and Infectuous Disease to produce an investigational vaccine designed to protect against Avian flu.

The Avian flu outbreak last season principally in Asia, although unfortunately North America was not entirely spared, highlighted the real threat posed by a potential pandemic.

We have availed our expertise in flu Vaccine production to produce approximately 8,000 doses of investigational vaccines for a IAID as it has taken on the enormously important leadership role in the U.S. to develop a range of solutions to the potential pandemic threat.

Amidst all this excitement at Chiron, we had a second quarter that turns out to be completely consistent with our expectations.

We saw strong sales across all three of our businesses, the details of which will be described by David Smith.

For now, let me just say that the 20 percentile growth year on year is a good indication of our strong underlying performance.

I will also add that we have been and we remain confident that we are on course for our 2004 guidance of $1.80 to $1.90 pro forma EPS.

And certainly as the flu season in the U.S. shapes up, our confidence is even more fortified.

So as we demonstrated to you at the Analyst Day, the story of Chiron is not just one of predictable earnings growth any longer.

It is also steady progress toward milestones that will lead to long-term value growth.

So in as an important a way as earnings growth, these milestones are an integral part of our communication to you, our investors.

They illustrate our focus on execution and our willingness to hold ourselves accountable.

And we know many of you have begun to examine the connection between those milestones, 20 in all in 2004, and how they translate into value.

In this regard, the creation of the U.S.

Vaccines Commercial Organization, one of those 20 goals, is worthy of a remark.

Without that capability, we-would not have advanced value enhancement of the PowderJect acquisition as much as we have.

With it, we grow ever more confident that the eventual size of the meningococcal vaccines' franchise will be substantial.

As for the rest of the milestones, in the past three months, we have checked off the following: starting a poly immunization for vaccine in New Zealand, completing enrollment in phase I trial for our broad coverage MeNB Vaccine, starting clinical trials for the Procleix West Nile Virus Assay.

Initiating the trial for IL2 [Retuximad] in [Retuximad] naive patients with low grade Non-Hodgkins Lymphoma, and starting the phase 3 trial for [Typokogen] in severe community acquired pneumonia.

These five are on top of the previous four that we have already checked, formation of the U.S.

Vaccine Commercial Organization, additional flu vaccine capacity for the U.S., Ultrio launch in the European Union, blood testing expansion into the Pacific Realm.

So, nine down, 11 to go.

We expect to have an exciting and productive year.

Now I would like to turn the call over to David for a detailed discussion of the second-quarter financial results.

Thanks, Howard.

I will begin with a review of the results for the quarter, which were released today at approximately 1 p.m.

Pacific Daylight Time.

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

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

The adjustments we made this quarter and in the second-quarter of 2003 to arrive at pro forma earnings consist of the amortization expense on acquired identifiable intangible assets related to acquisitions and discontinued operations.

A reconciliation between our GAAP and pro-forma results can be found on our web site in the investor section under financial reports.

For the second-quarter 2004, Chiron reported pro forma income from continuing operation of 48 million or 25 cents per share, which was in line with our expectations.

Chiron reported pro forma earnings per share of 35 cents in the second-quarter 2003.

The decrease in earnings per share for the second-quarter of 2004 as compared to the second quarter of 2003 was primarily due to the following two factors: the effect of our acquisition of PowderJect and the decline in the Betaseron royalty rate.

The impact of these factors was an approximate 11 cent decrease in our pro forma earnings per share.

Total revenues for the second quarter of 2004 increased 12% to 394 million from 350 million for the same period in 2003.

Product sales increased 20% to 295 million from 246 million.

Foreign exchange rates resulted in a 2% effect on total revenues.

Increases in sales were seen primarily in Procleix, TOBI, travel vaccines, and Proleukin.

Revenues from the joint business arrangement were up, primarily due to increased profitability of the business.

Collaborative agreement revenues, royalty and license fees and other revenues decreased 9% primarily due to the decline in the Betaseron royalty rate and the timing of license fees from our intellectual property portfolio partially offset by increased contract manufacturing activities.

Gross margins decreased to 56% from last year's gross margins of 60%, primarily driven by a decline in the gross margin for the vaccines business, along with the reduction in the royalty rate related to Betaseron and the increased cost of producing the Betaseron prefilled [Diluon] Syringe.

Research and development expenses for the second quarter of 2004 totaled 100 million up 12% from the second quarter of 2003.

The increase reflects the movement of our investment agenda and is primarily related to the development of [Tipicogin], our meningococcal franchise and flu cell culture.

These increases were partially offset by a decline in spending due to the discontinuance of development of [Tezacidibine] and [inaudible] 2794 and higher development cost in the second quarter of 2003 associated with Betaseron.

SG&A expenses for the second quarter of 2004 totaled 107 million, up 33% from the second-quarter 2003 with PowderJect and associated integration-related expenses contributing approximately one-third of the increase for the current quarter.

Integration-related expenses were approximately 1 million for the current quarter.

For future quarters, we do not expect integration expenses will be material.

Excluding PowderJect, increased SG&A expenses reflect the increase in sales across our businesses, investment, and geographic penetration and defense of our patents and technology.

Now I would like to move to a review of the business unit financial results starting with our blood testing unit.

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 115 million in the second quarter of 2004 from 106 million in the year-ago period, an 8% increase.

This increase was primarily due to higher product sales of Procleix over a year ago, as well as increased revenues associated with the increased profitability from our joint business arrangement with Ortho, offset by a decline in royalty and license fees.

Driving the Procleix's growth were three factors: first, the West Nile Virus Assay available on an investigational-use only basis in the United States, second, market share gains in the U.S. for product sales of Procleix, and third, continued penetration in the several markets abroad.

Royalty and license fees in the second quarter 2003 included license fees for our HIV and HCV technology for use in Europe for plasma [fractionation].

Turning now to vaccines, in the second quarter of 2004, total product sales for the vaccines business was 101 million, versus 86 million in the same period last year.

We saw increases in travel vaccines, flu vaccines and pediatric and other vaccines.

These increases were partially offset by a decline in Menjugate sales.

Sales of our travel vaccines were 40 million in the second quarter up 74% from the year-ago period.

The increase was driven largely by increased sales of our rabies vaccine in the U.S. and increased sales of our TVE Vaccine.

Sales of flu vaccines were 8 million in the second-quarter 2004, up 117% from the year-ago period.

The increase was driven largely by sales to South Korea.

Sales of pediatric and other vaccines were 48 million in the second quarter of 2004, up 6% from the year-ago period.

Our second-quarter Menjugate sales were 5 million, down 63% from the year-ago period.

This decrease was primarily driven by the timing of tenders, vaccination programs in various geographies, and increased price competition.

Gross profits for vaccines decreased to 42% from last year's gross margins of 56%.

This was the result of additional product reserves in the second quarter of 2004 as well as product mix.

Moving to our third business, biopharmaceuticals.

Total biopharmaceuticals product revenues including Betaferon royalties were 139 million in the second quarter of 2004, up from 124 million over the year-ago quarter, an 11% increase.

We saw increases in TOBI and Proleukin sales while sales of Betaseron, including the royalty earned from the sale of Betaferon by Schering in Europe declined.

Our second-quarter TOBI sales were 51 million, up 32% from the year-ago period due to wholesale ordering patterns, increased patient demand in the U.S., price increases and the benefit of foreign exchange rates.

Second-quarter sales of Proleukin were 35 million, up 19% from the year-ago period, primarily due to wholesale ordering patterns and price increases.

Second-quarter sales of Betaseron, including the royalty earned from the sale of Betaferon by Schering in Europe were 43 million, down 9% from the year-ago period.

The decrease was primarily driven by a decline in product sales and Betaferon royalties pursuant to our agreement with Schering and ordering patterns.

These decreases were partially offset by increased patient demand, price increases, the benefit of foreign exchange rates, and increased sales of clinical materials.

Gross margins in the biopharmaceutical segment increased to 74% from last year's gross margins of 71%.

The increase was due to price increases in improved efficiencies in production, partially offset by the contractual change in the royalty rate related to the sale of Betaseron and increased costs associated with the new Betaseron Prefill [Diluon] Syringe.

Now I'd like to bring to your attention one matter of housekeeping related to the timing of the Company's annual guidance.

For the past several years Chiron has provided guidance for the following year during our third quarter earnings call in October, 3 months before our full-year results.

We plan to move our guidance review to the full-year earnings call in January.

This move will allow us to base our guidance on actual results from the prior year and bring us in line with industry norms.

With that, let me take a moment to provide some highlights for Q2.

Sales were up 20% reflecting strong showings from all three business units.

Expenses were in line with expectations and consistent with our investment agenda.

We made excellent progress on flu vaccine production and now expect total U.S. doses to total 50 million for the 2004-2005 season with an additional 2 million doses for the CDC's stockpile.

We continue to advance our milestones with the start of the immunization campaign of the MeNB New Zealand Vaccine, start of the phase III for [Tipicogin] and severe community acquired pneumonia, and initiation of the West Nile Virus pivotal trial.

As we noted in both the Q4 and Q1 calls, Chiron's earnings have taken on a seasonal flavor for the past few years, and we acknowledge that 2004 would be even more significant in terms of earnings seasonality.

We have provided guidance that we would deliver pro forma earnings in the 20 to 25% range of total-year earnings for the first half of the year, and our first-half earnings confirm this as we came in on the upper end of that range.

We continue to affirm our full-year guidance of $1.80 to $1.90 with ever-increasing confidence as the year unfolds.

Our core businesses are delivering the earnings that we expect and that are consistent with our compounded earnings growth goal.

This healthy core business creates the currency to execute on programs that we believe will create significant shareholder value over the long term.

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

Thanks, David.

That concludes our prepared remarks.

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

We are joined for the Q and A session by Jack Goldstein, President of Chiron Blood Testing;

John Lambert, President of Chiron Vaccines;

Craig Wheeler, President of Chiron BioPharmaceuticals;

Stephen Dilly, Senior Vice President of Biopharmaceuticals Development and Bruce [Yarschmidt] Vice President Corporate Scientific Affairs.

A reminder, we ask you that each caller ask one question at a time and re-enter the que with additional questions.

That way we'll take all questions on the line.

Thank you.

We'll have our first question.

Your first question comes from the line of Mike King with Bank of America Securities.

Good afternoon and congratulations on a nice quarter.

I was wondering if you might be able to break down the components of the TOBI growth in a little bit more detail, because I noticed you got, you know, a number of things working in your favor.

So I was just -- I would love to know a little bit more about what happened there.

Sure, Mike, I will take a cut at that.

What we had was -- we talked about demand.

We have seen demand come up given some of the marketing programs that we put in place.

And it's running -- running in line with our expectations.

We also had a price increase which was taken earlier this year above the 5% range.

When was that, David?

Pardon me?

When was that?

That was in January, I believe.

Okay.

And there was a bit of FX.

We did have some wholesale ordering but you have to look at it, kind of, this quarter versus the prior year's quarter.

Prior year's quarter orders were slightly under demand -- were running under demand and this is more proximate to more orders being closer to demand.

What we were, you know -- so that is really what the component pieces are.

Okay.

Could you break down U.S. versus Europe?

We actually don't provide that level of detail, Mike.

Thanks.

Thank you.

Your next question comes from the line of May-Kin Ho of Goldman Sachs.

Hi.

Can you tell a little bit about the pricing of the additional doses of flu vaccines.

How that works for the 2 million doses during the seasons and then also for the stockpiling by the CDC.

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

Mr. Lambert, if you would please press star 6 to unmute your line.

I don't know why -- John, are you on the line?

We can't hear you.

May-Kin, let me take a stab at this.

This is Howard Pien.

The 2 million doses are generally higher priced than the pre-existing contracts.

As we talked about this a while back.

The pre-existing contracts were two-year commitments tied to a specific quantity.

The access quantity will allow us some pricing freedom and, indeed, the specifics we're uncomfortable yet to discuss for the reason that some of the these two million doses are sold at a price that is in conjunction with our negotiation for 2005.

Renewed terms of the contract as we mentioned in our script.

The -- the 2 million doses of stockpile that the CDC tender, we've submitted a price.

We have indication that we are likely to win that tender.

When that is formalized, we will make an announcement, but the price is higher than the prevailing average selling price of the 48 million doses for the overall market.

So let me see if I understand it.

So for the 48 million doses previously you had projected a price, I think, 750, maybe if I remember correctly.

I think the 750, May-Kin is the projected price of -- from the distributor to the physician's offices and the other direct outlets.

We have, I don't believe, ever disclosed specifically our price to the distributors.

Okay.

But let's assume this X, then the 2 million extra doses during the season would be higher than X?

Higher than X, yes.

And the 2 million for the stockpiling, would that be even higher than the first 2 million doses?

It is higher than X. And we are not yet ready to disclose whether or not it is higher than X plus Y.

And --

That will be public, May-Kin, very soon it will be public.

Okay, all right.

Just so you know there is a possibility that it may -- it may straddle the 2004-2005 fiscal year because its an end of the season supply.

The CDC is taking -- issuing this tender for the reason they want to have some products on hand in the event that -- that the flu season is more severe and all of the vaccines in the marketplace have been used up.

So the CDC tender is issued to be the end of the season manufacturing, and they are taking possession.

Right?

So there is some uncertainty as to whether or not that 2 million doses will be booked in 2004 revenue or some of it may spill over into 2005.

You meant the CDC part of it, but the additional 2 million doses meaning 50 million doses most of them will be booked in 2004.

All of that will be booked in 2004.

The 2 million stockpile, that's right, you understand it correctly.

But the 2 million doses on top of the 48 million, the price for those -- you said is in conjunction with the 2005 contracts?

No, it is a special tender.

It is a special tender for the stockpile, but what we take -- when they take -- when we finish making it and they take possession, some of those 2 million doses will fall in 2004 fiscal year, but some of it may fall in 2005 fiscal year.

Yeah, for the CDC.

For the CDC, yeah, the last 2 million doses of stockpile.

Got it.

But in terms of magnitude, I mean, if the first 48 million doses is X, the extra 2 million doses would be 2 X or higher?

No, it would not be 2 X but thank you for the confidence you personally placed on our capabilities.

Thank you very much

Thank you.

Your next question comes from the line of Alex Hittle with A.G. Edwards.

Thank you for taking my question and nice quarter.

My question is on Betaseron and the reference to clinical materials.

Could you explain what that is?

And, also, in the mix on international sales, is there -- in that an increase in materials manufactured by Chiron.

Thank you.

Sure, Alex.

The -- the clinical shipments are for -- provided to Schering for the trials that they are running.

For instance, the Beyond trial.

So this is the standard we have been supplying and booking top line for the clinical shipments for the past several quarters.

We just happen to have more in this particular quarter than we had in the prior year.

And I am sorry, I blanked on your last part of your question.

In terms of Chiron-manufactured product that is being sold overseas, was that a factor in the sales figure?

We do provide some to overseas, but it is not significantly higher than, let's say the previous quarters.

Thank you.

Thank you.

Your next question comes from the line of [Jeffrey Porges] with Sanford Bernstein.

Thanks for taking my question.

Follow-up question on the flu season.

I was just wondering if you could give us a sense of how you see the competitive landscape for flu vaccine in the U.S. this season.

Particularly how much you anticipate Aventis supplying, what they have committed to the CDC, and what they have done with their pricing and contracts and finally what is the likely Q3-Q4 split in your supply to the market.

Thanks.

Okay.

We will try this again, John.

Are you on the line?

Can you hear me this time?

Yes.

Okay.

So we -- we clearly don't know how many doses of Aventis is going to put on to the market, and we expect this year that the supply -- there won't be a great deal of excess supply.

As you know also with our business and through the contracts that all of our doses are sold.

So, you know, we are basically sold out for this year.

For Flumist, I think the figure has been closer to 500,000 doses are being put on the market by Medimmune.

But obviously this market is for healthy adults, and [inaudible] flu products and Aventis' the flu products are primarily targeted at the at-risk populations.

With the ACEP with us and Aventis out there creating awareness for flu, I see a very good season.

Even if we look at the, sort of, expanded recommendations from 50 to 64-year-olds, that gives a potential of 53 million additional vaccines this year, which currently I think the figure is 20 million are currently being vaccinated.

So, I think there is plenty of room for market extension.

It is very difficult I think to do a split between Q3 Q4, depends on [inaudible] relief.

Currently as it stands, you know, we expect similar delivery patterns to last year.

Everything is in place.

It is really very difficult to be precise on the numbers between Q3 and Q4.

John, just to follow up on that, are you any closer to having the under five label for Fluviron?

Well, we've got so many initiatives ongoing this year on flu.

You know, we have increased production tremendously, responding to the pandemic threats, responding to RFPs, the fact that we -- we expect to be sold out of capacity for this year and for the years to come.

It's not a great priority for us.

So, there is nothing really extra to report on that.

Okay.

Thanks very much.

Thanks Jeff.

Thank you.

Your next question comes from the line of Thomas Wei with Piper Jaffray.

Thanks very much.

I just wanted to ask on -- David, you had reminded us that the first-half guidance represented about 20 to 25% of EPS for the year, so based on the 47 cents that you have reported year to date, that would imply that even at the high end of that range, 2004 EPS should be at least $1.88.

Can you help us understand why you didn't narrow the guidance range at this time?

Whether or not there is the potential for upside there.

And what would -- what would need to happen in order for you to fall towards the lower end of that guidance range on annual EPS.

Thanks.

Okay.

I won't -- I won't try to do the math and figure out -- get to the $1.88.

We came in essentially at what we said the high end of the -- we call the 20 to 25% number.

So 25 cents being right at the top end of that.

What we -- you know, this is a company with, you know, very -- very positively positioned with multiple business units, so there are a lot of moving parts.

So at this point, as we look -- you know we look forward, we are very confident in being within that range, and -- but not -- at this point, given where we are, just -- just prior to the flu season, I don't think it is appropriate for us to try to narrow that range right now if we do at all during the course of the year, and it would be -- yeah, there are lots of things again with moving parts that can cause you to move up and down the scale between $1.80 and $1.90.

One of which Tom has said would of course be the shape of the investment agenda.

As certain projects go faster and go more aggressively, it is possible that we will find worthy candidates to receive more investments than our previous budgets.

So, I mean, we are running -- we are running a business as I -- as we try to say repeatedly and we hope that you have gradually incorporated -- we are running a -- an agenda -- a business, a company that is both looking to deliver reliability of earnings in the short run and growth of the earnings as we are looking to invest in the right things that will create value in the course of a year, or for that matter in the course of six months because of the large number of projects that constitute our investment agenda.

Our evaluation of the risk profile, our evaluation of their success probability may evolve, and we may decide that it is the right thing to do for long-term value creation that we invest a little bit more.

So -- so I -- I simply amplify David's point that as we look to a business that is increasingly concentrated the second half of the year, in revenue therefore in profit, the -- the -- our ability to say with precision based on the first two quarters what is going to happen in the second two quarters go down a bit.

So we are comfortable as we said for all of the reasons outlined including the strength of the flu season we can make that range.

But it is possible we may invest some of the upsides into projects that are worthy.

If we have all of those projects turning out to be at the prospect we thought they would, that would simply drop the earnings to the bottom line.

So it is just that six months is actually relatively short period of time into the year in the shape of our agenda, and in the shape of our revenues.

Thank you.

Your next question comes from the line of Eric Schmidt with SG Cowen.

Good afternoon.

Question on the Meningococcal Vaccine franchise.

I am familiar with all of your next generation products in development.

But can you update us on the near-term outlook.

You mentioned sales were down year-over-year in the first half, and I was just wondering if there was any Menjugate tender offers that are coming up or if we are looking for a down year year-over-year there.

John.

The market at the moment is pretty aggressive, and in fact there is quite a fair amount of pricing pressure.

It's quite often difficult to do a year-on-year comparison because it does depend on when tenders are being issued, and we do expect the sales to increase in the next quarter because as we get into September period where, you know, kids are going to school, and there is much more of a demand for the project.

But let's say the biggest -- one of the biggest issues we are facing is it is very competitive on pricing at the moment.

Okay.

Thanks a lot.

But, you know, we have -- we have a product which is very competitive, and, you know, we expect to be successful.

Great, thank you.

Your next question comes from the line of Tom Schrader with Harris Nesbit.

Good afternoon.

I understand you are working on flu contracts that were signed sometime in the past.

Do you expect to get exactly the same thing per dose that you got last year?

Are there price increases built into you there?

John ....

I am -- if I -- if I heard the question correctly, Tom, are we expecting our prices to the distributors to increase in the contract renegotiation.

No, no, I mean from last year.

I know it is an old contract, but is it absolutely a flat price from last year that you get this year?

Correct.

When were those contracts signed?

It was -- it was during the PowderJect days prior to the -- to the acquisition.

So three years ago?

I don't recall -- I've got a feeling they may be two-year contracts.

Yeah, PowderJect -- John, as I understand it, correct me if I don't quite have it right, at the end of 2002, the two-year contracts we signed by PowderJect with the American distributors.

Almost the entirety of those contracts were two-year contracts.

One of them turned out to be a three-year contract, and the contract was tied to an allocation of quantity in the price and the quantity projection at the time was about 38 million doses which turned out to be true for 2003 year.

The upside that we have in 2004 is in the extra delivery.

We now have 48 million doses since we outlined.

So there is some upward pricing relative to the contracts that were signed two years ago by PowderJect on the 10 extra million doses.

And we are starting to negotiate 2005-2006 contracts with 6 out of the 7 distributors.

The 7th distributor is the one with the three-year contract.

Their price tied into the quantity they agreed to will be true for 2005 season, but we are trying to negotiate the right kind of price and volume for the next two years with the contract with six of those distributors, and there is a little bit of a give and take as to how much price we take in the 10 million doses of extra doses that are coming to market this year.

Okay.

Thank you.

Very helpful.

Your next question comes from the line of Craig Parker with Lehman Brothers.

Hi, two questions.

The first, David, can you tell me what the effects on both the top-line and expenses were sequentially from currency?

For currency on the top line was about 2%.

On a year-over-year basis.

And down about 1% sequentially.

And I know you -- I don't think you've talked about this before, but impact on expenses?

We actually haven't talked about that.

Obviously when you've got an uplift in your currency, you are going to have an uplift in your expenses, and don't forget, we are in a net short position against the pound.

So on an overall basis, we were hurt by currency about one penny in this quarter.

Okay.

That's very helpful.

And then -- a question about travel vaccines.

That was actually the source of nearly all of your sequential revenue growth.

And this is the first time we have seen a second quarter of travel vaccine sales and the range has been, now, quite large from -- if I have my numbers right 11.3 million in the third quarter of last year now to this 40 million quarter.

Can you talk about the seasonality there and what effects contributed to the increase in sales?

There are two elements really.

One was the tick-borne encephalitis market in Germany where we had a very good -- very good quarter.

And also, the other element was rabies vaccine and as you're aware Aventis has had some supply difficulties with their rabies vaccine, particularly in the U.S., and we are in a position that we were able to fill the void that was there.

So it gave us a good boost to our sales.

So would you characterize those as -- as one-time events?

Or do they tend to happen in other geographies with some recurring -- or with some predictability.

The European tick-borne encephalitis should be a regular event.

The manufacturer having supply difficulty, this happens from time to time, and if you are in the position that you have got stocks and you can supply, you are in a position to supply it.

We have a solid rabies business.

Okay.

Thank you.

Thanks.

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

Hi, thanks for taking my question.

Just to get clarification again on how we can look at this upcoming flu season.

If I look back on some of your filed documents, I did see that Fluviron represented about 12% of revenues last year.

So -- and correct me if I'm wrong, but my math indicates that's about $210 million, and given the 38 million doses, that would imply a pricing at about $5.50 on average.

And I gather as you said you have contracts in place that will still support that kind of pricing, but if you can elaborate, you said with the additional supply, you have some ability to increase pricing?

Is that correct?

Yes.

Yes.

Elise, the answer is, yes, we do.

At this point we are not prepared to comment on what that uplift might be.

Okay.

Was my math correct in terms of how I was interpreting last season at least?

Well, I suppose it would be.

We talked about sales in the 210 million to 219 million and 38 million doses.

Right.

Okay.

All right.

And so, the one distributor for next season you indicated that only one of the distributors was locked up for another season.

What percentage of the estimated supply -- or of the doses does that of the new contracts or -- of the negotiated contracts that you are discussing now would that represent?

Elise, when we are done with the negotiations -- Howard Pien here.

When we are done with the negotiation which we indicated would not be the case until the fall, probably the end of the fall, we will be in a better position to tell you that.

Okay.

And [inaudible] those negotiations are ongoing, and you can imagine the dynamic there.

That if this flu season is as good as -- as good from the standpoint of the -- of the -- the distributors, as good as last year's.

The upward pressure on pricing would be greater, and, therefore, the -- and pending the -- our ability to extend ourselves on committing to a quantity for next year, which is part of the negotiation.

We can then characterize the distribution much better at that time.

Okay.

And can you also comment perhaps on what potential improvements there are on the margin side?

We cannot yet.

Okay.

All right, thank you very much.

Our next question comes from the line of [Ben Ulrich] with UBS.

Yeah, hi.

Just a quick question on the blood testing business.

I noticed on a sequential basis, it looked like there was a slight decline in the Procleix revenue and obviously assuming that you didn't lose any customers, I was wonder if that was perhaps a reflection of a lower number of donations in the quarter.

And in addition, I was wondering if you would give me a sense for what the instrument sales were as a component of that total Procleix number and whether they were similar to the first-quarter levels.

Okay.

This is Jack Goldstein.

You are correct, the -- well, quarter to quarter, the revenues were basically flat.

We had a particularly good quarter in the U.S.

Donations were up the first quarter in the U.S. and they were down a little bit in the second quarter in -- in the U.S.

Instrument sales were slightly higher in the first quarter than the second quarter.

I don't have the exact breakout.

But I think the issue for us is that some of our geographic expansion in Korea, et cetera, hasn't really kicked in yet, and so we are looking to the third and fourth quarter in order for increases in revenues quarter to quarter.

Okay.

Fair enough.

That makes sense.

And then in terms of the number of donations or just the level of donations on a quarter-to-quarter basis, I mean, clearly that fluctuates.

How can -- I mean, is there a way to look at that, is there any seasonality in that number?

Generally not.

Generally it is fairly constant.

We just -- there was an anomaly in the U.S. and for some reason donations were up in the first quarter.

Okay, thank you.

Your next question comes from the line of [Joseph Cerk] with Deutsche Bank.

Hello?

Yes.

Hi, actually it is Jen Chao.

Just a quick question on Fluviron in case I missed it Howard.

What is the maximum amount of Fluviron that you are able to manufacture this year?

You did give us a number for last year, and then the second is, with regard to the Meningococcal B Vaccine in New Zealand, are you expecting to be able to distribute that in the third and fourth quarter?

Can you maybe give us a proportion of what is expected in each?

And just back of the envelope that looks like it could be at least a couple of cents upside and I wanted to know if that was part of your original $1.80 to $1.90 guidance.

Thanks.

I will take the second question first.

The MeNB New Zealand was in our expectation.

There is no -- It does not represent a upside vis-a-vis our expectation when we gave guidance.

Of course sales -- we thought that the sales would come in the second half of the year rather than the first half of the year.

So there is actually -- I mean we are very proud -- very proud to find that we are able to make a significant contribution toward a nation's -- what will amount to be a disease eradication program in its full course but it is not a -- financially a major driver.

We have quite a bit of development costs and the price that we get relative to both the manufacturing costs and the development cost is, how should we put it, charitable.

So it is not a driver on the EPS at all.

The U.S. -- the U.S.

Fluviron situation, let's just review the bidding.

We thought it was going to be 48 million doses for the year.

We now have just outlined what we think the situation is going to be.

We can get -- 48 becomes 50.

On top, we have two more million doses of CDC stockpile for a total of 52.

Just to let you know, if you were wondering about some other numbers you heard about before, for example, 50 -- 48 Fluviron, 48 Fluviron for the U.S.

There is out of the liverpool plant that makes Fluviron, there is two more million doses of Fluviron that will be made but that is for the UK market.

Originally its 48 plus 2. 48, U.S. 2, UK.

Now it is 50 for corresponding to the 48, plus 2, that is the UK, plus 2 at the end of the season for CDC stockpile.

Okay.

Thanks for clarification.

Your next question comes from the line of Mike King with Bank of America Securities.

Thanks for taking my follow-up.

The -- I was going to riff on the earlier question about Procleix.

And Jack, you mentioned that some of the geographic expansion hadn't kicked in.

I was wondering if you could be more specific, what are the key drivers in 2004 that you should point us to for Procleix?

Well certainly the continued movement of Ultrio into the European market although as Howard said in -- in his initial comments that we have started to move toward our 30%.

We are not quite there yet.

The 13 centers that are using Ultrio or that are -- there are 13 centers that are either using Ultrio or have contracted.

Some of them are winding down their duplex inventory.

So, again, we should see some -- some increases in pricing as we move into the third and fourth quarter.

Korea just hasn't started mass screening yet.

They should sometime in the third or fourth quarter.

We are not exactly sure when they will be.

They are up and running with Procleix, but they are not up and running in their other centers, and they want to -- where they are using a competitive test.

So they want to be testing the entire country all at the same time.

So that will happen soon, but we don't exactly know when, and we continue to make advances in -- in other geographic expansion countries.

In Poland sales are going very well.

We are up to about 225,000 donations that are being tested using Procleix.

That will continue.

In Greece we are at about 130,000 units.

That will continue.

And in Thailand, we are at about 110,000 units, and that's moving to 350,000 units.

In addition, we are doing filings of Ultrio in the U.S., as well as we have some other conversions of Ultrio in other countries, in -- for example, Singapore and New Zealand that will be happening toward the end of the year as well.

So we are still clicking away, but as you know, it is kind of a step-wise center-by-center type of phenomenon.

Thank you.

Tracy, we are nearing the end of our hour, so we have time for one more question.

Your final question comes from the line of Quentin Lay with Robert W. Baird.

Hi, nice quarter.

I just wanted to get an update on the [Sagres] acquisition and how is that going to fit into your oncology program.

This is Craig Wheeler.

We were quite excited about the opportunity to purchase [Sagres].

It really is a great definition of accretive technology for us.

As you may know [Sagres] has a platform that is an oncology platform looking at evaluating target space on a insertional [mutogenesis] technology.

When we look at that technology and what [Sagres] had, it fit extremely well with our internal technology that we had in genomics our expressed RNA and really you should look at this deal as bringing a technology and a platform in-house that enables us to accelerate the validation of our targets and some the targets we were looking at, we believe it will have the potential to take a year to a year and a half off of target validation and then bringing it forward into potential clinical programs.

We anticipate the first value will be to bring higher quality targets for our antibodies program and collaboration with [Zoma].

That concludes our question and answer period I will now turn the call back to Howard for our closing remarks.

Great, Martin.

Our success this quarter underscores Chiron's ability to execute on our vision for the future.

We have a clear set of drivers for growth.

We have a clear understanding on how we can augment value creation through the strategy that we have articulated and have implemented.

We are investing for the future while intending to maintain the strong financial results that are now a hallmark of Chiron's reputation.

Our resolve is to turn this set of strategy into action and action into results.

We look forward to updating you on our progress in the quarters to come.

Thank you very much for joining us today.

This concludes today's conference call.

You may now disconnect.