Novartis AG (NVS) 2004 Q4 法說會逐字稿

Good afternoon.

I will be your conference facilitator.

At this time, I would like to welcome everyone to the Chiron fourth 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, then the number one on your telephone key pad.

If you would like to withdraw your question, press star, then the number two on your telephone key pad.

Thank you.

I will now like to introduce our moderator, Miss Marty Dear, Senior Director of Investor Relations.

Madam, you may begin.

Thank you.

Good afternoon and welcome to Chiron's fourth quarter 2004 conference call.

I'm Marty Deare, Senior Director of Investor Relations.

On behalf of the Chiron team I'd like to introduce you to our principal speakers on today's call.

Howard Pien, Chiron's President and CEO, and David Smith, Chiron's Chief Financial Officer.

Before we discuss Chiron's fourth-quarter results let me remind you that our remarks today will include forward-looking statements relating to future events and the financial performance of the Company, including statements regarding revenue growth, clinical development, product approvals and our ability to remediate our Liverpool facility and deliver Fluvirin for the 2005, 2006 influenza season.

Actual events and performance may differ materially from our expectations.

We refer you to our documents -- to the documents that the Company has filed with the SEC including the most-recent 10K and 10Q for a discussion of important factors that could cause the Company's actual performance to differ from what is expressed or implied in today's remarks.

These factors include, among others, adverse actions taken by the MHRA or FDA with respect to Fluvirin, regulatory review and approval of products in development and competition.

In particular, nothing in these remarks should be construed as assurance that Chiron will resume manufacturing or sales of Fluvirin for the 2005, 2006 influenza season.

We do not undertake any obligation 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 or otherwise referred to a non-GAAP financial measure, we have posted a reconciliation of such numbers to GAAP on our website in the investor section under financial reports.

In addition, a reconciliation of pro forma numbers to GAAP is attached to the press release of our quarter results that we issued earlier today.

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

Now I will turn it over to Howard.

Good afternoon and thank you for joining our call.

I'd like to cover three topics today in my remarks.

Chiron's performance in 2004 our ongoing work on Fluvirin and the goals that we have have set for 2005.

David will discuss our financial results from the fourth quarter and the full year of 2004 as announced in our press release earlier today.

Afterwards, we will be glad to respond to those of your questions that we can answer.

As was the case last quarter, what we can say about Fluvirin today is entirely contained in our prepared remarks.

Looking back on 2004, Chiron had notable achievements across all of our businesses.

Plus, as you know, we also had a very difficult last quarter.

While we saw increases in sales of nearly all of our other products, we did not have any sales of Fluvirin for the '04, '05 season.

We also incurred additional expenses related to Fluvirin's remediation and license extension.

Our full- year pro forma results of $0.70 per share came in at the low end of our revised guidance.

And for the fourth quarter, we reported pro forma loss of $0.04 per share.

Excuse me.

These results encapsulate where we had been in an evolving situation.

From the announcement of the anticipated delay in delivery of Fluvirin in August to the surprise suspension of license by the MHRA in October, the construction and the speaking of regulatory guidance on a comprehensive remediation approach since, we have navigated a challenging and shifting terrain.

But with our sights set beyond the immediate horizon, not just on achieving remediation, also on long-term value creation.

One of our most-important growth for 2005 is indeed due to achieve remediation of the Liverpool facility and to supply Fluvirin for the upcoming season.

A team of more than 70 experts is working diligently and tirelessly towards this goal.

It is a testament to the strength of our organization that we have been able to draw from our other sites and businesses to provide additional manufacturing and product quality leadership to support our core team of internal and external specialists in Liverpool.

We describe our remediation approach as comprehensive and systemic because we aim to go beyond the observations noted by the U.S. and UK regulatory authorities from their respective October inspections.

And as a result of having proposed this approach, MHRA has now agreed to conduct a series of inspections with the goal of clearing specific parts of our operation in a logical sequence in accordance with the path towards ramping up for production.

If we are successful with all of these inspections, we expect to be able to begin commercial production.

As these work-in-progress inspections proceed, the MHRA could again notify Chiron of an extension of the suspension of our license beyond the current three-month suspension that took effect starting on January 4, 2005.

And if and when MHRA concludes that we have met the standards, it may lift the suspension at any time.

FDA inspectors are expected to be observers to most of these inspections and will conduct a separate inspection on its own.

Because our list of remediation activities is long and our timeframe is tight, we cannot say with any certainty whether we will progress as far as we need to by the time we hit critical junctures over the next month.

We can only say we're doing all that is feasible and our dedication is profound and intense.

For this reason, we're not offering 2005 EPS guidance until the prospect of reaching our goal one way or the other is clearer.

Needless to say, as we progress, we will communicate our successes and disappointments as appropriate.

What we will say and when we will say it will also be guided by the actions of the MHRA and the FDA.

While Fluvirin has been a monumental event in 2004, it was not necessarily the most defining characteristic of our last year.

You will all remember that at the start of last year we set forth ambitious goals we said we would strive to reach in commercialization, in regulatory submissions, and in phase movements, along with the corresponding financial expectations which collectively formed the scoreboard on how we would progress towards value creation.

Out of the 20 goals that we established for 2004 we achieved 16. 2 of the misses related to Fluvirin.

The other 2 were the distinction of the U.S.

Menjugate program due to changing market conditions and the delay in the initiation of the phase 3 study for Tobramycin in inhalation powder until this year.

The milestones we did achieve spanned our businesses.

Of particular note were 3 regulatory submissions for Pulminiq and for Procleix solid trio in the U.S. and for Cubicin in the European market.

As well as one approval of the Procleix TIGRIS system in the European union.

So despite the substantial attention focused on Fluvirin, 2004 at Chiron arguably was better characterized by the progress we made towards steady and persistent enhancement of value-creation capability.

We look forward to building on these successes with the 17 milestones we have set for 2005.

We have set out 5 commercial, 3 regulatory, and 8 phase movement objectives, as well as the financial goal of EPS that is to be communicated when we can.

Highlights of these objectives follow.

We have seen spectacular growth in our NAT business based on the success of our original Procleix HIV 1, HBV assay and now our Procleix outfill assay.

As I mentioned earlier, Chiron completed the U.S. regulatory submission and gained European approval for ULTRIO, which adds -- had the assay to the HIV 1 and hep C assay.

More than 30 percent of our European union customers adopted the ULTRIO assay in 2004.

Reports of HBV detections in these blood sensors have already underscored the improved safety provided by the use of ULTRIO.

2005 will be a transitional year for the blood testing division as we pursue the next drivers for growth and get ready for 3 U.S. product approvals in '06.

For 2005, we anticipate that our growth will come from 3 drivers.

Further penetration of ULTRIO as we work to convert at least 50 percent of the European Union customer base to ULTRIO; further geographic expansion as we aim to enter four new countries with Procleix; and introduction of Procleix TIGRIS out side of the U.S.

TIGRIS represents an important step in the automation of blood testing.

TIGRIS addresses our customers' needs by increasing through-put by at least 5 times and thereby further enabling individual donor testing.

Following our recent European approval of TIGRIS, we will work to replace TIGRIS -- work to place TIGRIS into key blood sensors.

We initiated a U.S. clinical trial for Procleix West Nile virus assay in '04, as you remember, and we expect to file a BLA for the product in the first quarter of '05.

Approval of this assay in the U.S. will enable us to initiate commercial pricing.

We're hopeful that we will have U.S. approval for ULTRIO, for TIGRIS, and for West Nile Virus in 2006, driving further significant growth in our Blood Testing business.

Outside of Fluvirin vaccine's division has achieved meaningful successes in '04 as well.

We filed an IND in the U.S. for cell culture.

And the manufacturing process of this product may provide greater flexibility and has the potential to enhance pandemic preparedness.

And for our meningococcal disease progress our '04 plans include the initiation of a phase III program for the menz ACWY vaccine and of a phase II trial for our Genomics-based pioneering menzB vaccine.

Our BioPharma business has made great strides in 2004 and it has aggressive goals for '05, including product launch.

Pulminiq which is cyclosporin for inhalation to prevent chronic lung transplant rejection has the potential to improve survival, we're then showing mortality reduction by 79 percent.

We expect FDA action in the third quarter of this year and we will soon start an early access program.

And as with Pulminiq we have an opportunity to leverage our existing sales force with Cubicin, which we licensed from Cubist, who holds the U.S. rights.

We have filed with the EMEA for marketing approval of Cubicin, complicated skin and soft tissue infections.

Cubicin holds the potential to address serious ground negative infections including MRSA, a growing menace in the European markets.

Cubicin possesses bacterial sidal activities and no known mechanism of resistance development.

We look to expand this initial label with data from an endocardice trial, which we expect later this year.

We also expect to extend our inhaled antibiotic business through the initiation of phase III study of tobramycin inhalation powder or TIP.

We anticipate that the convenience of this portable hand-held device from our partner Nectar (ph) have reduced administration time, maybe down to 3 minutes, where we result in better compliance and greater penetration of the cystic fibrosis market reaching younger, more active patients.

In our phase III study for tipocogin for severe community acquired pneumonia, we anticipate an interim look by the DSAP monitoring board in the second half of this year and we expect to complete enrollment for this pivotal study by the end of next year.

Our BioPharma business continues to make progress in our oncology franchise.

We are continuing to enroll patients in the Pro study in combination with Retuximad (ph) in low-grade non Hodgkin's lymphoma.

We're also excited about Chiron 258, our first orally available small molecule Chinaise (ph) inhibitor, now in the clinic.

We will expand a phase I testing and expect to select a first indication and dosing regimen in 2005 in order to enter phase II and possibly registration trials in 2006.

We also filed an IND for Chiron 1212 in December of 2004.

This is our first monoclonal antibody that we've put into development.

We will be working with our collaborator Zelma to bring this product into phase I testing in patients with B cell malignancies.

So looking at Chiron as a whole, we see the power of our Blood Testing business with its leadership position in state-of-the-art blood safety technology.

We have a tireless and motivated vaccines organization focused both on remediation of Fluvirin and working on programs on the meningococcal disease.

And our BioPharma business has demonstrated much in hands regulatory business development and development capabilities while improving the balance and productivity of our pipeline.

Altogether, we entered 2005 eager to execute on 17 objectives, 5 blood testing, 4 in vaccines, 7in bio pharmaceuticals, along with the corresponding financial goal.

As we work towards achieving these 17 milestones, our efforts are driven by our commitment to our long-term mission of value creation and protecting human health.

Now I'd like to turn the call over to David for the discussion on financial results.

Thanks, Howard.

I'll begin with a review of the results for the quarter and the full year, which we released earlier today.

All earnings per share amounts that I'll be discussing 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 year to arrive at pro forma earnings consist of the amortization expense on acquired identifiable and tangible assets and purchased in process research and development related to acquisition.

The adjustments in 2003 consisted of the amortization expense on acquired identifiable intangible assets and purchased in process research and development related to acquisitions plus the Biogen and Serono settlements in connection with the McCormick patents as Marty mentioned a reconciliation between our GAAP and pro forma results can be found on our website in the investor section under financial reports.

For the year Chiron reported pro forma income from continuing operations of 133 million, or $0.70 per share.

Chiron reported pro forma earnings per share of $1.54 in 2003.

In the fourth quarter of 2004, regulatory actions concerning our Liverpool facility precluded any release of our Fluvirin influenza vaccine during the 2004, 2005 influenza season.

As we noted during our Q3 earnings call, our entire Fluvirin product has been reserved for in 2004 resulting in a 91 million charge to cost of sales.

For the fourth quarter Chiron reported a pro forma loss from continuing operations of $0.04 per share.

Total revenues for 2004 decreased 1 percent to 1.7 billion from 1.8 billion for 2003.

Product revenues decreased 6 percent to 1.3 billion.

Sales of Fluvirin vaccine were 219 million in 2003, due to the suspension of our license in our Liverpool facility there were no sales of Fluvirin vaccine in 2004 for the 2004, 2005 influenza season.

Excluding sales of Fluvirin vaccine, our total revenues increased 12 percent and product revenues increased by 13 percent.

The effect of foreign exchange rates in 2004 was a 3 percent increase to total revenues.

Increases in sales were seen primarily in Procleix, TOBI, other flu vaccine products, Proleukin and travel vaccines.

I would like to point out the significant growth rates from both Procleix and TOBI on a year-over-year basis at 25 percent and 24 percent respectively.

Royalty and license fees were up primarily due to our settlement agreement with Roche regarding our HIV patent in the U.S.

This settlement had a $0.18 positive impact on EPS for 2004.

Revenues from the joint business arrangement were up primarily due to an increase in royalties and higher profits from Ortho's U.S. operations and foreign affiliates, partially offset by a one-time benefit in the first quarter of 2003 due to a change in estimates relating to Ortho's foreign affiliate sales.

Collaborative agreement revenues and other revenues were relatively consistent year to year.

Gross margins decreased to 47 percent from last year's gross margins of 58 percent.

As I noted, our entire Fluvirin product has been reserved for 2004.

This was partially offset by additional costs in 2003, associated with inventory that was acquired during the acquisition of PowderJect.

In addition, 2004 F of sales included approximately 2.6 million in Fluvirin remediation costs.

Excluding these 2 charges, our gross margins in 2004 would be 55 percent.

Research and development expenses for 2004 totaled 431 million, up 5 percent from 2003.

The increase is primarily related to the development of Tipocogin our oncology franchise, our meningococcus vaccine franchise and flu cell culture.

These increases were partially offset by the discontinuance of certain development projects in 2003, in addition 2003 included expenses related to the end licensing of Cubicin, and technology from ZymeQuest and IDI.

SG&A expenses for 2004 totaled 461 million, up 21 percent from 2003. 18 million of the increase was due to the effect of foreign exchange rates and there were additional expenses of approximately 12 million attributable to our third-quarter 2003 PowderJect acquisition.

In 2004, there were approximately 11 million in legal costs related to the Fluvirin license suspension, the remaining 10 percent increase in SG&A reflects a broad range of activities significant among them the defense of our patents and technology, ongoing marketing and prelaunch programs to support the continued growth of our business, investment and geographic penetration, and corporate governance.

Our full-year effective tax rate was 25 percent.

Now what I'd like to do is move on to a review of the business unit financial results starting with our Blood Testing business.

Blood Testing total revenues including product sales Chiron's share of the revenues from our joint business arrangements with Ortho.

Collaborative agreement revenues in royalty and license fees increased to 494 million in 2004 from 422 million in 2003.

A 17 percent increase.

This increase was primarily due to higher product sales of Procleix over a year ago, higher royalty and license fees and increased revenue from the joint business arrangement.

Driving the Procleix growth was the full year of Procleix West Nile virus assay available on an investigational use-only basis in the United States.

Continued penetration in the several markets abroad, the introduction of our Procleix ULTRIO assay outside the U.S., and market-share gains in the United States for product sales of Procleix.

Also contributing to the higher -- to the increase were higher royalty revenues for the use of HCB and HIV intellectual properties relating to NAT testing and higher revenues from our joint business arrangement.

Royalty and license fees in 2004 reflect the completions of license agreements and corresponding license payments with the blood transfusion centers of the German Red Cross and Laboratory Corporation of America Holdings, and our settlement with Roche regarding the HIV patent in the United States.

These increases were partially offset by a license fee in 2003, from Baxter related to our HCV and HIV technology for use in the plasma fractionation (ph) market.

Revenues from the joint business arrangements were up primarily due to an increase in royalties and higher profits from Ortho's U.S. operations and foreign affiliates partially offset by a one-time benefit in the first quarter of 2003, due to a change in estimate relating to Ortho's foreign affiliate sales.

Turning now to vaccines.

In 2004, total product sales for the vaccine's business were 481 million versus 678 million in 2003.

Sales of Fluvirin vaccine were 219 million in 2003, there were no sales of Fluvirin vaccine in 2004 for the 2004, 2005 season.

Excluding the sales of Fluvirin vaccine, vaccines product sales increased 4 percent.

Sales of our other flu vaccines were 152 million in 2004, up 34 percent from 2003.

The increase was driven largely by price increases and the impact of foreign exchange rate movements.

Sales of our travel vaccines were 99 million in 2004, up 12 percent from 2003.

The increase was driven largely by increased sales of our rabies vaccine in the U.S. market, partially offset by lower sales of our TBE vaccine as 2003 included a shipment that had been expected in early 2004.

Sales of pediatric and other vaccines were 200 million in 2004, up 4 percent from 2003.

Primarily due to the timing of tender sales for our polio vaccines and diphtheria, tetanus, and pertussis vaccines partially offset by the previously announced divestiture of certain operations in Sweden, acquired via the acquisition of PowderJect.

Excluding these operations in Sweden, sales of pediatric and other vaccines were up 9 percent from 2003. 2004 meningococcus vaccine sales were 28 million, down 58 percent from 2003.

This decrease was primarily driven by lower Menjugate sales due to significant price erosion partially offset by the commencement of sales of menzB vaccine in New Zealand.

It's now clear that the model meningococcus C vaccines are past their prime.

The future, particularly in the United States, is with combination vaccines such as our ACWY program.

Gross margins for vaccines decreased to 25 percent from last year's gross margin of 53 percent.

Reserves were established for our entire Fluvirin product in 2004, resulting in a $91 million charge to cost of sales.

In addition, 2004 included approximately 2.6 million in Fluvirin remediation costs which were charged to cost of sales.

Excluding these 2 charges our vaccines gross margin would have been 44 percent.

The decrease year-over-year was driven by the loss of sales of Fluvirin vaccine and reduced sales and reduced gross margins for Menjugate, which were partially offset by a fair value adjustment to the PowderJect inventory in 2003.

Moving to our third business, BioPharmaceuticals.

Total BioPharmaceuticals product revenues including Betaferon royalties were 563 million in 2004, up from 503 million in 2003.

A 12 percent increase.

We saw increases in TOBI and Proleukin sales while as expected Betaseron revenues decreased.

Our TOBI sales were 213 million, up 24 percent from 2003, primarily due to increased patient demand in the United States.

Wholesale ordering patterns, price increases and a favorable movement in the euro to U.S. dollar exchange rate.

Our Proleukin sales were 129 million, up 12 percent from 2003, primarily due to wholesale ordering patterns and price increases.

Our revenues from Betaseron including the royalty earned from the sale of Betaferon by Schering in Europe were 182 million down 3 percent from 2003.

This decrease was primarily driven by a decline in the royalty rate, by 5 percentage points pursuant to our contractual agreement with Schering.

This decline was partially offset by price increases, the favorable movement in the euro to U.S. dollar exchange rate, increased patient demand and inventory ordering patterns.

Gross margins in the BioPharmaceutical segment were 72 percent, consistent with 2003.

In summary, let me address 2005 guidance and then take a moment to recap the 2004 highlights and what we look forward to in 2005.

Regarding 2005 guidance.

Typically we would provide full financial guidance on this call, however, as Howard mentioned earlier, the biggest swing in our financial performance in 2005 is whether we will achieve successful remediation of our Liverpool facility.

As you know, we're in the midst of that process leaving us no basis to predict yet whether and when we can be back in production.

Therefore, we will wait until we have more clarity to provide you with EPS guidance, which may not be in the first quarter.

However, we'd like to provide revenue guidance where we can for 2005.

Outside of Fluvirin, we expect that we will continue to experience growth in each of our businesses.

We expect BioPharma revenues to experience mid-single digit growth anchored by TOBI.

We anticipate vaccines revenues not including Fluvirin will grow in the high single digits with solid growth in travel vaccines.

We have stated that 2005 is a transitional year for Blood Testing.

We expect total Blood Testing revenue growth to be in the high single digits for 2005, we expect incremental growth in NAT in the mid-teens due to geographic expansion and further penetration of ULTRIO and TIGRIS.

Finally, we expect our royalties and license fee revenues overall to be approximately 10 percent lower than 2004, this is a result of significant one-time settlement payments we recognized in 2004. 2004 was an eventful year for Chiron.

A year in which we accomplished 16 of our 20 milestones.

In the face of our biggest challenge as a Company to date.

We believe the achievements and growth delivered in our Blood Testing and BioPharma businesses reflect the ongoing commitment we have to advancing long-term value creation.

We welcome 2005 and the goals we have set for ourselves, include a significant achievements in all 3 businesses.

We will continue to invest in critical development programs to ensure long-term sustainable growth and ultimately value creation.

Before we start the Q&A session, I must remind you that we are not answering questions related to Fluvirin.

We will greatly appreciate it if you would keep your questions focused on the rest of the business and the financial results.

As we have stated, we intend to communicate to you the broad terms and progress of our remediation efforts and other significant Fluvirin related news when it becomes available and is appropriate.

Thank you for your understanding on this matter.

Now I'll turn the call back over to Marty for Q&A.

Thank you, David.

That concludes our prepared remarks.

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

We are joined for the Q&A session by Jack Goldstein, our COO, Dean Walther, President of Chiron Blood Testing, Steven Billy, Senior Vice President of BioPharmaceutical Development.

And Bruce Harshnette, Vice President of Corporate Scientific Affairs.

I'd like to remind you to please limit yourself to one question per caller and with that we'll take the first question.

At this time, I would like to remind everyone.

If you would like to ask a question, please press star, then the number one on your telephone key pad.

We will pause for just a moment to compile a Q&A roster.

Your first question comes from Jennifer Chao with Deutsche Banc.

Great.

Thanks for taking the question.

First, just -- I just feel compelled to try to -- try to understand something, Howard.

In terms of understanding the process as it's ongoing.

Can you just give us a sense of what the status is of your discussions with key U.S. flu vaccine distributors for '05?

Those -- those discussions are ongoing.

And we don't yet have a basis of saying how they're going to turn out.

As you know, there are 2 prospective entries into the -- into the '05 season.

And some of the contracts we understand has already been offered.

Our distributors have been looking to discuss whether or not those terms of the contracts that were in the pre-existing agreements that we had from 2004 would be extended and the discussions are still ongoing.

And they, as we are, look forward to having some clarity on these situations as we get pronounced more clearly whether or not we're going to achieve remediation.

Just so that I understand, Howard, the 2 points of entry, just clarify for us what that is.

And then just also a clarification in terms of the deadline for when you need to start manufacturing in order to have meaningful participation in the '05 period, obviously your suspension term goes until the early part of April, and David also made comments that financial guidance might not be provided here until -- into the second quarter.

So what is that deadline for manufacturing start?

We -- the deadline is not set by ourselves, but by the evolution of the remediation process, as we've described there's going to be a series of -- series of inspections that will be scheduled at the appropriate time that reflects the activities that we're performing in remediation and reflects the path to achieve remediation in a way that is going to be timely for us to be able to supply the market.

If you must draw some sort of absolute deadline.

The absolute deadline will be actually set by the collective competitive activities of who comes to the market first.

So -- and -- and which historically happens, around or soon after Labor Day.

So you can almost back off from there.

But that's not -- that's not the way that we're thinking about our remediation activities.

We have these set of activities -- we have described them to the regulatory agencies.

And we're looking for the regulatory agencies, to be able to tell us whether -- through their inspections whether or not we are performing against them.

Our hope is that by early spring, therefore, we have enough clarity that we can say something about whether or not we're getting there.

Okay .

And then sorry just on the re-entry, if you could just help us understand those timepoints?

I think you read them in the press as well.

There are 2 companies that have announced that they're likely to be in the U.S. market in 2005.

One of them is IB biomedical, the other one is GSK.

Okay .

Just a point of clarification.

ID biomedical thinks the odds are low that they're in '05, so that's -- those would be the 2 though that you're citing.

I read what I -- what you read in the press.

Okay .

Yes.

Great.

Thank you.

Just going to remind you to limit your questions to one question per caller.

Your next question comes from Eric Schmidt with SG Cowen.

Good afternoon.

David, I'm wondering if you could provide any expense guidance for '05 and in the absence of expense guidance whether you could clarify whether these charges that you talk -- the incremental legal expenses for remediation costs associated with Fluvirin whether they were all in Q4 or how we should sort of think about the Q4 run rate into '05?

Sure.

The -- the guidance that we have provided is the -- to the extent that we can give you at this point in time, which is really the top line guidance, we'll be giving the overall P&L guidance as we typically do when we have the clarity around the remediation.

The -- we did incur expenses somewhere in the -- close to $15 million between legal and remediation in Liverpool during the fourth quarter.

We are obviously still going through both aspects related to Fluvirin, both in the legal field as well as in the -- in the Liverpool area.

So you can expect to see expenses rolling forward but I really can't give you any type of predictor in terms of run rate at this point in time.

Thanks.

Your next question comes from May Kin Ho with Goldman Sachs.

Can you tell us on the phase III trial for Tipocogin how many patients have you enrolled at this point and how many do you expect in the second half of the year?

And for the legal expenses, there seem to be quite a lot for the fourth quarter.

Is that a reserve that you're putting down?

May Kin, let me address the legal side first and then I'll let Steven take it -- sorry, I get to go first.

The legal expenses are those expenses as incurred at this point in time.

So it is the work that we are doing with outside counsel.

So that is not a reserve, if you will, at this point.

Steven.

Okay .

We're on track with the Tipocogin enrollment for declared -- of a second half of '05 interim look if you remember.

That requires us to both enroll 900 patients and also have the key end points from the patients available.

And the -- we're in the classic early part of the clinical trial within a recruitment ramping up month over month and this is the fifth consecutive month of increased enrollment.

If we -- as expected, hit that interim goal in the second half of this year that we'd expect to complete the overall enrollment for the study, during 2006.

But basically we're on track and recruiting in all 4 of our (INAUDIBLE) continents.

Thank you.

Your next question comes from Elise Wang with Smith Barney.

Hi.

Just to follow up on the expense run rate.

Actually, can you just provide clarification on the R&D expense run rate?

It obviously was significantly higher this past quarter.

And just want to understand, what specifically accounted for that, although I think you tried to elucidate some of that in the press release.

But if you could also give us some idea of what that means going forward.

Well, I can talk about what we've had during the course of this year again.

We have continued to -- speaking about going forward, you know, we've set milestones in 2004 which Howard talked about and we also have significant milestones set for 2005.

And we believe that we need -- we should be continuing to do the investment in what we have characterized as our investment agenda.

We think there are some compelling opportunities for us there.

That's about all I can do in terms of color on what to expect going forward.

In terms of what occurred in the fourth quarter, what we've had was the continuing activities around Tipocogin, we filed an IND for 12/12.

A number of activities across the board in each one of our businesses that occurred.

So it's more or less the standard expectation that we have in terms of, you know, the way that the R&D spend should be going given where each program is in its phase of development.

Okay.

Thank you.

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

Thanks.

Just a clarification for the guidance that was provided on the revenues.

Blood Testing was described in '05 growing high single digit and you moved to nucleic acid testing and talked about mid-teens.

Should I think of those two as separate where Blood Testing encompasses the Ortho line item as well as unconsolidated or Blood Testing is inclusive of nucleic acid testing when you give high single digits.

Blood Testing includes nucleic acid testing in terms of the guidance.

So we expect NAT, which we've been breaking out, to grow obviously at a higher rate.

And as we noted on one of the pieces on the other side is royalties which would be relative one -time payment levels from Roche this year.

We don't expect that we would have that same level of run rate on the royalty side.

So we expect it to be down.

Which is somewhat of an offset, which brings you closer to on the overall basis for Blood Testing down in the high single digits.

Is there any comment you can make about the direction on changes in commercial pricing?

Let me give that over to Dean to see what he may want to talk about.

Excuse me.

Certainly the impact of ULTRIO as we continue to gain additional traction we're leveraging our pricing with ULTRIO and we've been successful in being able to achieve a premium price as a result of that for competitive reasons we've obviously been somewhat guarded about the range and the direction that we give there.

But we are hitting the desired targets that we have in terms of a premium pricing for the addition of the HBD detectability within ULTRIO.

Okay.

Thank you.

Your next question comes from Satnish Revostivol with Morgan Stanley.

Yes, hi.

Could you help me understand a little bit on your Men ACWY vaccine.

How does your competitive landscape change or really how does your (INAUDIBLE - highly accented language) plan change in front of (INAUDIBLE) launch?

Bruce.

The question relates to ACWY and the competitive climate.

Maybe I can comment first that the Menacra approval is certainly consistent with our expectations.

We see this as a substantial unmet median market which will accommodate more than one supplier.

And more than one supplier is also important from a public health standpoint.

As you know, we are currently completing phase II developing, look forward to seeing those final results and have set out a 2005 objective of initiating phase III development for our program.

Okay .

And just a quick question.

Do you give clarity on the milestones that you set out for the year as to what they are?

Milestones related to this program, or more generally.

Just generally, because you said that you set 17 milestones for the year.

Yes.

Actually they're on the website.

They're posted on our website.

Okay .

Thank you.

Yes.

Next question, please.

Your next question comes from Geoff Porges with Sanford Bernstein.

Thanks for taking the question.

Could you give a little bit more clarity on the timing for the improvements or at least the -- the product upgrades in the U.S. over the next 18 months or so for testing, specifically when we should anticipate West Nile, hep B, TIGRIS and even IDT.

And if you can give any commentary or flavor on what the economic impact you expect for those improvements would be, that would be very helpful.

Thanks.

Okay .

Jeff, I guess a couple of things.

Number one, in -- I think your question is predominantly U.S. related, correct?

Yes, that's right.

Okay .

In September of 2004 we submitted our ULTRIO BLA.

So that has been completed and submitted.

Also in 2004, we completed the pivotal trials for West Nile.

And we are expecting to submit to the FDA that BLA first quarter of '05.

So within the next several weeks we'll be submitting that BLA submission.

Along with that, then, is TIGRIS.

Both from a 5/10 K perspective, but also as it relates to ULTRIO and West Nile.

So our expectation is that we will have approval from the FDA in the first half of '06 for all 3 of those products.

And then obviously given the market position that we have we'll be working very rapidly to convert the market as quickly as possible for ULTRIO and certainly the TIGRIS platform gives us the ability to enable the market to move to smaller pools.

Where and at what rate that will happen, I think is yet to be determined.

But certainly one of the limiting factors thus far has been their ability to do smaller testing either in smaller pools or single donor because of the manual aspects.

And the full automation of TIGRIS will address those issues.

Could you just give us a sense of what the incremental economics for the labs are of going to both TIGRIS and then IDT?

I mean, is there a value to the labs that you would expect to accrue from that?

We certainly expect with West Nile BLA approval that we we'll go from a cost recovery to a commercial price.

Obviously we're not at a point where we're discussing commercial pricing until we get FDA approval.

But in terms of ULTRIO, again we expect to get a similar premium to that which we are seeing in our European sector.

I don't think it's going to be a 50 percent increase, but something -- you know, something less than that.

And then I think TIGRIS is really -- you have to consider that the old razor razor blade scenario where TIGRIS will enable us to put additional reagents and get additional consumption, especially as pool size gets driven down.

Okay.

Thank you.

That's helpful.

Your next question comes from Eric Ende with Merrill Lynch.

Thanks for taking the question.

My question relates to the gross margins.

What I'm trying to understand is what the gross margins will look like if Fluvirin does not get on the market.

Now , you took a charge this year of 91.3 million.

Of that 91.3 million, how much of that is considered fixed cost and how much of that is really variable cost?

Well, that's the -- that was the value of the inventory at the time of production, at the time of -- each one of the stages.

So there are additional components we talked about on the fourth-quarter call last year, the facility is typically idle in the fourth quarter and that idle cost is somewhere in the 10 to $12 million range.

So from that perspective, you know, backing that out, if you back out Fluvirin and its effect on the -- for the $91 million charge and the remediation costs, we're at about a 55 percent margin for the year.

We were obviously very heavily -- or we were impacted by the price erosion Menjugate.

Not only were sales down significantly on a year on year basis but the pricing as a result of the pricing the margins were also down as well.

But I -- within that 91 million, though, there has to be a fixed-cost component that would still exist.

You're saying it's only 10 to $12 million?

It was 10 to 12 in the fourth quarter.

So could we assume that it would be 4 times that, so call it 40 to $50 million of fixed cost that you would still incur?

If a facility were not being utilized, that's not an unreasonable assumption.

Okay .

Thank you.

Our next question comes from Thomas Wei with Piper Jaffray.

Thanks very much for taking my question.

I had a question on the Blood Testing business and a little surprised that you showed flat sequential growth in the numbers there.

Can you just go over what some of the factors might be instrument sales or a lag in the the impact of some of the new customers that you had talked about previously?

And what are the 4 countries that you mentioned might impact the '05 numbers?

Okay .

Thomas.

This is Dean.

I'll see if I can't try to fix those up.

On this one let me know.

I think the -- the flat quarter-to-quarter growth that you saw in the product sales was attributable probably to 2 main things.

One, there is a seasonality effect that you see in the fourth quarter given the holidays, those typically are the lowest draw months and donation months and so based on our pricing model, we see some impact due to that.

I think the other thing is that our business tends to have steps to it, as you know, based on either approvals or its customers come on line, we see an increase and then it basically stays at that level for some time.

So in terms of new customer additions and whatnot, we had several of those occur in and throughout the third quarter and potentially late and so we're seeing some of that flatness there.

It was offset by instrument sales that occurred in the third quarter that we didn't see then because those customers were up and on-line in Q3 as opposed to Q4.

I think the other thing is -- is -- that you asked about was the -- I think the impact of the 4 countries in '05.

And those 4 countries -- while -- for competitive reasons again we're not going to disclose specifically those countries, but what I will say is that we have market development activities underway in roughly 20 countries right now.

Various stages where we've submitted registration to the authorities and they're at various stages in the review process.

And of those, roughly 20 countries we're anticipating that we will generate revenues in 2005 from at least 4 of those countries.

Thomas, this is Jack Goldstein.

I'd just like to add a little bit more flavor to growth in 2005.

As David already told us, that we'll -- we'll experience mid-teens growth in NAT.

And that's going to be powered by conversion to ULTRIO, the introduction of TIGRIS, ex US, and with that, really increased market penetration in those territories, as well as some geographical expansion as Gene had explained.

Next question, please.

Your next question comes from Alex Hittle with AG Edwards.

Thank you.

I'm trying to get a handle on the -- through underlying earnings power of the Company here.

Your guidance going into the start of the year was $1.80 to $1.90.

Having come in at $0.70 you're down $1.10 a share, which is something in the neighborhood of 200 million in net profit.

And my question is.

Is all of that attributable to flu, or had the flu problems not arisen, you know, where would your earnings have come out?

That's an interesting question and one that we probably fantasize a little bit about.

The -- we gave guidance back in October that said we expected somewhere between $1.10 I think and $1.15 downdraft as a result of the situation.

So realistically, most of what this has come from has come from has become -- because of Fluvirin and that situation.

So if you reversed it, you know, it's -- you can't -- you can't audit this, but we would have been somewhere within the range perhaps at the upper end of the range had we not had the situation.

Okay .

And then help me out here financially.

You took a $91 million charge to write-off the inventory.

And yet the shortfall is running about 200 million, I make it, all in.

You've got some legal costs.

Where's the balance come out?

Well, you've lost -- you lost profits so didn't have enough sales.

Okay.

Your next question comes from Tom Shrader with Harris Nesbitt.

Hi.

Good afternoon.

I have a question about normal flu vaccine production in -- in a perfect year after you guys find out the strains, is there time to make practice loss, or are you guys pedal to the metal the day you know the strains.

Strains we would generally learn, Tom, in the late February, early March sort of time frame.

And -- and it reflects the observations that are made by WHO and by the FDA of the Southern Hemisphere.

The manufacturing process crank out you first get the eggs, you inoculate the eggs, and then you start to harvest from the eggs.

The -- the primary material from which you can then make it into the bulk material, but in that process, you prepare from the eggs you prepare the C, you prepare the media.

You have to figure out how to purify the material from the eggs to the -- to make for the bulk and then you start to formulate and you have the bulk.

So those are the major processes that go on and that define the scope of the primary manufacturing activity.

And then, of course, once you've made the bulk, you then try to put it -- you then put it into the secondary material -- you do the secondary manufacturing, which is packaging and finishing.

And throughout this whole process, you have built in routine testing procedures to ensure that the product that you're making is the product that you think it is and then -- and test for sterility and for contamination and so on.

That's why you have a -- you have a egg-based manufacturing procedure that is generally said to be in the range of roughly 5 months from the beginning till you have your vials ready to be shipped.

So when -- in a normal year, are there any practice lots, or do you try to sell the first stuff you make?

I didn't understand the question.

Practice lots?

In a normal year, would you make practice lots?

Or would you try to sell the very first flu vaccine you made?

I don't know the answer to that question.

You're saying that we made too many vials?

Do we have any call lots or validation lots or anything.

We have a -- of course we have validation lots.

In a normal year?

Yes, every year.

Okay, okay.

Thank you.

Your next question comes from Craig Parker with Lehman Brothers.

Hi.

Steven.

I wonder if you can remind us about the nature of the Tipocogin interim analysis and what decisions we might hear as a result of that interim analysis.

As I recall it, there's a comparison of the dose groups on the 28-day mortality, but might we also hear that the study has been stopped overall?

Okay .

So this is an analysis at 900 patients against the primary end point, which is 28-day all cause mortality.

It also includes a look across the dosing groups in terms of any particular safety signal we might see.

It's designed with a very high hurdle in terms of efficacy.

So we do not expect to be stopping the study for efficacy at the interim analysis.

It's not designed that way because we want to run on to completion 2,100 patients so we can do a robust analysis of the effect of Tipocogin and subgroups.

The principal purpose of this is to determine whether both active groups or one active group should continue to completion of the trial.

If you remember, we've take taken two groups forward to .025 milligrams per kilogram per hour at a .075 milligrams per kilogram per hour, both of those in 96-hour infusions.

The reason for taking the higher dosing group was to make sure that we're absolutely on the plateau of the dose response curve.

It's rarely going to be a trade-off.

Does that give us a significant signal in terms of improved efficacy?

And is there any hint of a decreased safety profile at that dose?

So this analysis I'm afraid is going to be invisible to the outside world.

That's one of the rules of conduct of the study so that we don't affect the conduct of the trial itself.

But what will happen is that the Data Safety Monitoring Board will trigger a change in the supply chain and the package that's delivered to the sites, which will again be invisible to investigators in the outside world.

And what you'll know is that we are continuing the study.

So the only grounds on which the study might be stopped are hitting that efficacy hurdle and can you comment on what that is?

And for safety reasons, or is there not a futility analysis in that protocol?

There is absolute a futility analysis in the protocol.

So the study could be stopped for one of two reasons.

One of them is futility and the other one is a significant safety signal that precludes continuation of the study.

So we're not going to talk about what the absolute numbers are in that analysis, but obviously the likelihood of success goes up post interim.

Thank you.

All right.

This will be our last question, please.

Your final question comes from Quintin Lai with Robert W Baird.

I was wondering about the Blood Testing Q4 new customer adoption, whether or not customers were delaying on the pending CE marking for TIGRIS.

So my question is.

How is TIGRIS being received now that it has been CE marked and is it part of your expectations for driving ULTRIO penetration to 30 to 50 percent?

Hi, Quintin.

Yes, I think that -- I wouldn't say that it necessarily delayed it, but, you know, the fact that it came mid-December meant that we didn't see much of a significant impact in the fourth quarter.

But, certainly, since then we have had a tremendous response.

We've had -- I think it's 43 customers representing 20 different customer sites throughout Europe have signed up or have already participated in a two-day demonstration at our Paris facility.

So we are getting good exposure from the marketplace and significant interest there, which we believe will facilitate the conversion.

As I said, we're already at 30 percent, enabling us to get to that greater than 50 percent of our current customers converted to ULTRIO and we think TIGRIS will help us to do that as well as to increase penetration with customers that are currently using a competitive technology.

Thank you.

Ladies and gentlemen, we have reached the end of the allotted time for questions and answers.

Miss Deare, are there any closing remarks?

Yes.

Howard?

Thank you.

The next 2, 3 months will be pivotal in our efforts to achieve remediation of our Liverpool facility and to produce Fluvirin in time for the upcoming season.

But apart from Fluvirin, at the same time we are dedicating ourselves no less ardently to achieving the milestones that we have set for 2005.

We believe that this list of milestones represents the steady and balanced approach that Chiron has charted towards long-term value creation.

We look forward to reporting to you on our progress throughout the year.

We thank you all for joining us and we thank those in particular who are wishing us well and hoping that we're successful.

Thank you very much.

Thank you.

Ladies and gentlemen, this concludes today's Chiron fourth-quarter 2004 financial results conference call.

You may now disconnect.