Novartis AG (NVS) 2005 Q1 法說會逐字稿

Good afternoon.

My name is Janika (ph) and I will be your conference facilitator.

At this time, I would like to welcome everyone to the Chiron Corporation first-quarter 2005 financial earnings conference call.

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

After the speaker's remarks, there will be a question and answer period. (Operator Instructions).

Thank you.

Ms. Dier, you may begin your conference.

Good afternoon and welcome to Chiron's first quarter 2005 conference call.

I Mardi Dier of Investor Relations and I would like to introduce you to our principal speakers on today's call -- Howard Pien, Chiron CEO and David Smith, Chiron's CFO.

Joining us for the Q&A on today's call are Jack Goldstein, President and COO;

Craig Wheeler, President of Chiron Biopharmaceuticals;

Gene Walther, President of Chiron Blood Testing;

Stephen Dilly, Senior Vice President of Biopharmaceuticals and Development;

Bruce Scharschmidt, Vice President of Corporate Scientific Affairs.

I would also like to introduce Dan Soland, President of Chiron Vaccine, who is joining us on today's call.

Before we discuss Chiron's first quarter results, let me remind you that our remarks today will include forward-looking statements related to future events and the financial performance of the Company, including statements regarding earnings expectations, clinical development, product approvals, our delivery of FLUVIRIN doses in the 2005-2006 influenza season and the market for flu vaccines in the upcoming season.

These forward-looking statements involve risks and uncertainties that are subject to change.

No assurances can be given that additional issues with respect to FLUVIRIN vaccine will be resolved completely and successfully in the timeframes described herein or that we will be able to deliver FLUVIRIN to the market for the 2005-2006 influenza season.

Many factors could cause actual results and developments to differ materially from those expressed or implied by these forward-looking statements, including among others regulatory review of products and development; marketing effectiveness, additional adverse developments resulting from investigations by the FCC and U.S.

Attorney and/or actions taken by the FDA or UK MHRA.

We refer you to the documents that the Company has filed with the SEC, including our most recent 10-K and the upcoming 10-Q, as well as our earnings release for a discussion of the other 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 an obligation to update the forward-looking information we're providing today.

Please note that where we indicate the numbers to be pro forma in today's discussion or otherwise refer to a non-GAAP financial measure, we've 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 first quarter results that we issued earlier today.

Now I will turn the call over to Howard.

Thanks, Mardi, and good afternoon.

Thank you all for joining our call.

I would like to begin my remarks today by discussing the drivers for growth in our Biopharma and Blood Testing businesses, followed by an update on the status of FLUVIRIN mediation, which is of course a key factor underpinning our financial expectations for 2005.

David Smith will then discuss our results for the first quarter and provide you with greater details about the financial expectations.

And then afterwards, we will be glad to answer your questions.

At the beginning of this year, we provided that you with 17 (ph) milestones against which to measure our performance for 2005 and these milestones are a combination of phase movements, regulatory filings and other commercial achievements.

Together, they provide a picture of a company that is executing on opportunities to drive growth in the near-term, while at the same time, investing in projects that we expect to generate value for our shareholders.

While we recognize that we are beginning this year with a quarter that is apparently aggressive in terms of our financial results, we believe that we are on track to achieve our guidance for the year and our catalysts for growth are clear.

We have gotten the year off to a good start, meeting two of the 17 milestones for the year and we are making steady progress with the rest.

Let me talk about the programs that we expect the majority of our growth starting with our near-term drivers.

Our Blood Testing business represents multiple opportunities for growth in the coming months.

We continue to execute on our strategy to grow the business through geographic expansion, through new assays and will include automation.

In the first quarter, we were able to check off one of our 17 goals when the BLA was filed by GenProbe for the PROCLEIX West Nile virus assay.

Earlier this month, we announced that the health authorities in South Africa had chosen PROCLEIX TIGIRS system with the PROCLIX ULTRIO assay to screen approximately 1 million units of blood donations annually in the country.

This agreement puts us solidly on top towards was achieving our goal of entering at least four new geographies this year.

Conversion of our EMEA customer base to PROCLEIX ULTRIO is going well.

We're on target to hit our 50% conversion goal and we're hitting our end market target buys ULTRIO.

We are also making excellent progress with TIGRIS, which continues to gain momentum.

We've made our first sales of TIGRIS in the European Union and we have now placed 10 units in the U.S. under the PROCLEIX West Nile IND in anticipation of use with the PROCLEIX West Nile assay this mosquito season.

Looking ahead, we expect another round of growth opportunity as we await three FDA approvals for our West Nile virus assay for TIGRIS and for PROCLEIX ULTRIO assay which can project by early 2006.

Our BioPharma business also offers the potential of several near-term opportunities.

In June, an advisory committee to the FDA is expected to hold a hearing on PULMINIQ, which as you know, is the cyclosporine for inhalation to prevent chronic lung transplant rejection.

Pending FDA approval on PULMINIQ, we are committed to bring this potential life saver quickly to the market.

We're also awaiting approval from the EMEA to market CUBICIN, or daptomycin, which we licensed from Cubist in the European Union for complicated skin and soft tissue infections.

We expect data later this year from an endocarditis and bacteremia media (ph) trial and the results from this trial could be used to expand CUBICIN label post-approval.

Also in the late phase pipeline is our Phase III study of TIFACOGIN for severe community-acquired pneumonia .

Enrollment is on track and we anticipate an interim look by the Data Monitoring Board before the end of this year.

In addition, by the end of the year, we expect to initiate our Phase III study of tobramycin inhalation powder, or TIP.

The success of this product will greatly enhance convenience for patients by reducing administration time, in turn leading to greater compliance by patients and increased penetration of the cystic fibrosis market, particularly in more active patients with a milder disease.

While FLUVIRIN has captured a great deal of attention, I want to remind you that in our vaccines, we have a pair of milestones related to our meningococcal program this year.

We are on track to initiate a Phase III trial for our MEN ACWY (ph) vaccine, as well as a Phase II trial for our MEN-B vaccine.

In the longer-term, we also see promising opportunities in both Blood Testing and Biopharmaceuticals as we advance programs that will expand our commitment to blood safety and build our oncology portfolio.

In Blood Testing, we're in conversations with the FDA to define the clinical protocols for A-Type ECO registration.

ECO , as you will recall, is the system for enzyme conversion of red blood cells to universal blood Type O. With our partner ZymeQuest , we're proceeding and we expect to complete a feasibility study and initiate a pre-pivotal study later this year.

While we are still early in the development of an NAT-enchanced immuno assay to detect in human blood the variant CJV prion we have made remarkable and encouraging progress to date.

We have demonstrated the ability to protect animal and human prions in tissue samples, a significant step in our development process.

In BioPharma, we continue to make progress with our oncology franchise.

Just last week, we announced that we had initiated clinical testing of Chiron-12.12, a full human, antagonistic antibody in patients with chronic limbo lymphocytic leukemia.

With this initiation, we achieve our second milestones for 2005.

This is the first compound in development with our collaborator XOMA.

We anticipate that we will begin clinical testing of Chiron-12.12 in patients with multiple myeloma later this year.

We are also on track with Chiron 258, our first orally available small-molecule kinase inhibitor currently in Phase I testing in solid tumors in AML.

Our milestones for this year is to select a first indication and dosing regimen for Phase II development.

Taken together, these early stage programs offer the potential to the meaningful advancements towards the improvement of care for patients and significant opportunities for creating shareholder's value.

Now to FLUVIRIN.

I am pleased to say that we have made tremendous strides in the remediation of our Liverpool facility.

As you know, the MHRA lifted the suspension of our manufacturer's license in Liverpool last month subject to our continuing to effectively implement our remediation plan.

We are performing validation trial in primary production, we're doing egg innoculation and we're growing seed strains .

We have begun to ramp up our manufacturing process of FLUVIRIN for the upcoming season.

This said, and despite the progress that we have made, there are still hurdles.

The MHRA could re-suspend our license at any time if they determine that we are not in compliance with GMP (ph) and the FDA will inspect our plan in conjunction with the warning letter they issued last year and the inspection or inspections could result in further actions by the agency.

Now I'm going to give you more nuances on our remediation of efforts.

As many have pointed out, the challenges that we face in trying to return to market one season after our manufacturing license was suspended are serious and formidable.

But with our eyes on the stakes involved; that is, we're not just looking to regain revenue but also to fulfill the public health interests in supplying vaccines, we have dedicated huge future efforts and are ferociously executing on our remediation plans.

We have significantly strengthened the vaccines management fee, we have and will continue to train employees on these new standard operating procedures that accompany the many changes in processes and upgrades and capabilities of the plant.

Our efforts are designed and directed not just at meeting the requirement at the agencies that are implementing the fundamental changes that will embrace an environment of continuous improvement to work towards the highest level of quality.

That is why our remediation plan consists of a detailed systemic and comprehensive set of tests to guide us toward our final goal, which is to sustain our license reinstatement.

Some of these milestones address the specific issues outlined by the regulatory agencies and many others are beyond the specific observations of the MHRA and the FDA and are aimed at a durability of the overall system in the Liverpool plant.

From the start, we have recognized this approach as ambitious and responsible and we sought the guidance of both the MHRA and the FDA and we are grateful to the FDA and the MHRA for their willingness to work so closely together and with us so that we can return to the market as a reliable supplier of flu vaccine.

We recognize the enormous amount of managerial attention at those agencies that has gone into their review, the consultations and the inspections of our remediation effort and intensity that is probably unprecedented and from which we have benefited enormously.

The reinstatement of our FLUVIRIN license by the MHRA is we believe a reflection of the validity of our remediation approach and a reflection that the MHRA recognizes is the significant commitment we have demonstrated.

Notwithstanding what we believe is a improving understanding in the interactions between Chiron and the regulators, we remind you again that the license reinstatement goes hand-in-hand with our ability to continue with what remains to be done in the remediation plan.

We also expect now that the FDA will conduct one or two full inspections between mid-June and mid-July when the commercial production will have to address (indiscernible) enough.

The two agencies are now in regular contact as our remediation plan continues to progress.

Now with all of these nuances, we give you our expected range of production of FLUVIRIN for the season.

We're providing a range because it is early in the production cycle, because we still have to follow through with both the remediation plan and the regulatory approvals of the amendments that we're making to the production process and because we have yet to be very certain of the production yields.

Having said all that, we believe that we have capability to produce between 25 million and 30 million doses of FLUVIRIN for this season.

And if any, this projection is the progress we've made so far and the vigor of our effort and the intensity of our commitment.

We have also been refining our commercial plans for FLUVIRIN for this year and beyond.

Great progress has been made in clarifying the demand side (ph) for 2005 as we have concluded discussions with our distributors for this year.

We have received commitments from our distributor network for all the doses of FLUVIRIN we currently project to produce.

We note that the pricing environment for flu vaccine is strong and that the overall market has increased this year.

And of course, our price with our distributors has increased significantly, reflecting the greater value placed on the influenza vaccine.

With the continued efforts of the CDC and the current vaccination recommendations, we believe long-term demand for the flu vaccine in the U.S. will continue to grow.

The current CDC guidelines call for immunization of high-risk group which represent 180 million individuals.

We believe that as the supply of flu vaccine returns to normal with our commitment to return to the market and at least two new suppliers entering into the U.S. this year or next, the confidence in supply capabilities on the part of the health care, the public health agencies and the health care professionals will also strengthen, this will have the effect of a long-term steadiness in the growth of the overall demand as flu vaccine is highly attractive as a public health strategy in pharmacoeconomic terms.

And public policy of the U.S. government has reflected this recognition.

Medicare reimbursement for flu vaccination has increased this year with the payment for administering a flu shot more than doubling, so as Chiron works to reemerge from our license suspension and our production disruption, we do so not just with the commitment and intense dedication, we also have enormous optimism about the long-term viability of this market.

Let me conclude with some brief comments about the financial expectations.

David will provide you with more detail in his section and all that I want to say now is we are expecting pro forma earnings of between $1.40 and $1.50 per share for 2005, which incorporates 25 to 30 million doses of FLUVIRIN for the '05-'06 season at a significantly higher average selling price, and also incorporate the investment agenda for value creation.

I'm updating you on many of our 17 milestones this year.

We expect that '05 will be a dynamic year at Chiron and our ability to successfully execute on these goals will lead to tangible results in the short term.

We expect to have up to 6 regulatory approvals in the next 18 or so months, which ULTRIO, TIGRIS, West Nile virus assay, PULMINIQ, CUBICIN, and of course the amendments to our FLUVIRIN license reflecting the changes that we are making to the process.

This list underscores our will to produce results that will catalyze growth.

The other programs in development that I've talked about today represent attractive opportunities in the mid and long-term.

Together, all of our efforts reflect our unwavering commitment to steady value creation.

Now I would like to turn the call over to David.

Thanks, Howard.

I will begin with a review of the results for the quarter which were released earlier today.

All earnings per share amounts that I will be discussing today refer to the pro forma diluted per-share earnings unless otherwise noted.

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 first quarter of 2004 to arrive at pro forma earnings insist that the amortization expense have acquired identifiable intangible assets related to acquisitions.

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

For the first quarter of 2005, Chiron reported pro forma income from continuing operations of 7 million, or $0.04 per share.

Chiron reported pro forma earnings per share of $0.22 in Q1 of 2004.

The suspension of our license in the Liverpool facility and related expenses had considerable impact on the results for this quarter.

We incurred FLUVIRIN remediation and related legal costs of $26 million.

In addition, our Liverpool facility was not in flu production during the first quarter, resulting in an incremental idle facility charge of 13 million.

Total revenues for the first quarter of 2005 increased 7% to 407 million from 380 million for the same period a year ago.

Product sales decreased 1% to 277 million from 281 million.

The effect of foreign exchange rates in Q1 of this year was a 1% increase in total revenues.

Increases in sales were seen narrowly in travel vaccines, meningococcus vaccines and PROCLEIX NAT products, offset by declines in pediatric and other vaccines BETASERON and PROLEUKIN.

Revenues from the joint business arrangement were up primarily due to higher profits from Ortho's foreign affiliates.

Royalty and license fee revenues were up primarily due to our Q3 2004 settlement agreement with Roche regarding our HIV patent in the United States.

Collaborative agreement revenues and other revenues were relatively consistent year-over-year.

Gross margins decreased to 41% from last year’s gross margins of 55%, primarily driven by the expected decline in the gross margin for the vaccines business due to 16 million in remediated related cost and 13 million in incremental costs associated with the idle plant as a result of our license suspension.

In addition, planned idle facility time for our biopharmaceuticals manufacturing operations contributed to the decrease in gross margins.

Research and development expenses for the first quarter of 2005 totaled 110 million, up 12% from the first quarter of 2004.

The increase in R&D was primarily due to development efforts in the oncology franchise, development of new processes and procedures in existing manufacturing facilities for BETAFERON and development efforts for CUBICIN, Tifacogin and blood testing programs.

This was partially offset by research and development programs that have been discontinued or disposed of prior to the first quarter of 2005.

SG&A expenses for the first quarter of 2005 totaled 132 million, up 26% from the first quarter of 2004.

In Q1 of this year, there were approximately 10 million in legal costs related to the FLUVIRIN license suspension; 3 million of the increase was due to the effect of foreign exchange rates.

The remaining 14% increase in SG&A reflects a broad range of activities.

Significant among them ongoing marketing and prelaunch programs for CUBICIN and PULMINIQ, investment in geographic penetration and corporate government.

Our effective tax rate in Q1 was 25%.

Now I'd like to move onto a review of the business unit financial results, starting with our Blood Testing unit.

The 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 134 million in the first quarter of 2005 from 117 million in the year-ago period, a 14% increase.

This increase was primarily due to the higher sales of PROCLEIX NAT products over a year ago, higher royalty and license fees as well as increased revenues associated with increased profitability from our joint business arrangement with Ortho.

Driving the PROCLEIX NAT products growth was the introduction of our PROCLEIX ULTRIO Assay outside the U.S. and continued penetration into several markets abroad.

This growth was partially offset by a slight reduction in U.S. donations.

Royalty and license fees in Q1 of 2005 reflect our settlement with Roche regarding the HIV patent in the U.S. and revenue from various license arrangement which are entered into subsequent to the first quarter of 2004.

Turning now to vaccines, for the first quarter of 2005, total product sales for the vaccines business were 87 million versus 86 million in the same period last year.

We saw increases in travel vaccines and in meningococcus vaccines, partially offset by declines in pediatric and other vaccines and flu vaccines.

Sales of our travel vaccines were 44 million in the first quarter, up 90% from the year-ago period.

Sales of our rabies vaccines and our TBE vaccines drove the increase.

The increase was driven by greater demand for rabies vaccines in the U.S., primarily due to a product recall from a competitor and increased demand of our rabies vaccines in Asia.

In addition, our TBE vaccine had an additional 13 million of sales in Q1 of 2005.

Our first quarter meningococcus vaccine sales were up 9 million up 101% from the year-ago period.

This increase was primarily driven by sales of MenB (ph) meningococcal B vaccines to the Ministry of Health in New Zealand.

Sales of pediatric and other vaccines were 30 million in the first of quarter 2005, down 40% from the year-ago period.

The decrease was driven largely by a decline in sales of our polio vaccines through our manufacturing upgrade which resulted in a delay in manufacturing and lack of product availability, as well as the planned divestiture of certain vaccine operations in Sweden, the second quarter of 2004 acquired our acquisition of PowderJect.

Sales of flu vaccines were 4 million in the first quarter of 2005, down 54% from the year-ago period.

The first quarter of 2004 included additional sales related to the 2003-2004 season of FLUVIRIN to the CDC in the United States.

Gross profit for vaccines decreased to a negative 3% from last year’s gross margins of 33%.

The first quarter of 2005 as we mentioned included FLUVIRIN remediation costs of 16 million that were charged to the cost of sales line.

In addition, our Liverpool facility was not in commercial production during the first quarter of 2005 due to the remediation activities with the resulting effect of a $19 million charge to cost of sales, an incremental increase of $13 million over the same period last year.

Moving to our third business, Biopharmaceuticals, total Biopharmaceuticals product sales were 119 million in the first quarter of 2005, down from 127 million over the year-ago quarter, a 6% increase.

We saw declines in PROLEUKIN sales and sales of BETASERON while sales of TOBI were essentially consistent at 53 million.

BETAFERON royalties were 15 million in the first quarter of 2005 compared to 14 million in the first quarter of 2004, an increase of 12%.

First quarter sales of PROLEUKIN were 30 million, down 7% from the year-ago period, primarily due to decreased patient demand in the United States and wholesale ordering patterns, partially offset by price increases.

First quarter sales of BETASERON were 27 million, down 12% from the year-ago period.

The decrease was primarily driven by the timing of shipments to Berlex and inventory ordering patterns.

Our first quarter TOBI sales were 53 million, essentially consistent with the year-ago period due to increased patient demand in the United States and price increases, offset by wholesale ordering patterns.

Gross margins in the Biopharmaceuticals segment decreased to 72% from last year’s gross margins of 76%.

As we mentioned previously, this decrease was primarily the result of a planned increase in idle facility time.

Now I'd like to turn and talk about our financial expectations for 2005.

As Howard mentioned, we will continue to drive to be back in the U.S. influenza vaccine market this year.

We'll also focus on continued investment in our near-term development opportunities and later stage pipeline programs across all three businesses.

We expect total revenues to be around $2 billion for 2005 and total product sales to be around 1.6 billion.

As we noted in our fourth-quarter call, we expect to see Blood Testing total revenues experience high single-digit growth with PROCLEIX NAT product sales experiencing mid-teen percentage growth for the year.

We expect vaccines product sales growth to be in the 50% range.

As we discussed earlier, we anticipate, barring production and regulatory issues and assuming that we're able to successfully complete remediation, that we have the capability to produce between 25 and 30 million doses of FLUVIRIN in 2005 with commitments from our suppliers commensurate with this range.

We continued to believe the pricing environment for FLUVIRIN remains strong.

We expect Biopharmaceutical revenues, including the BETASERON royalty, to grow by mid-single digits anchored by growth in TOBI sales (technical difficulty) royalty and license fee revenues will be approximately 10% lower than 2004 based on a number of significant onetime payments received the last year.

We expect our gross margins to be in the low to mid 50% range.

Again, gross margins will be impacted in 2005 by technical remediation related cost along with increased idle Liverpool facility time.

Operating expenses should increase by mid- to high-single digits over 2004.

This includes costs related to FLUVIRIN matters.

Our tax rate will be at or higher than it was and 2004.

As a result of the above, we expect our pro forma earnings-per-share to be in the range of $1.40 to $1.50.

I would like to remind you that we believe that technical remediation related costs will be more concentrated in the first half of this year.

As such, these costs in addition to the impact of anticipated flu sales in the third and fourth quarters well exacerbate our seasonality, making our earnings even more weighted to the latter part of 2005.

Finally, I would like to underscore our ongoing commitment of value creation for investors which plays an important role in our guidance for 2005.

We continue to execute on our investment agenda. making steady progress towards our goals for the year.

The development programs in each of our businesses are advancing our proposition for value creation.

We look forward updating your on our progress in the periods to come.

At this point, I'll turn the call back over to Mardi for Q&A.

Thanks, David.

That concludes our prepared remarks and now I'd like to open up the call for questions.

Because our prepared remarks ran so long, we ask that you please limit yourself to one question so we can get to everybody.

Thank you.

(Operator Instructions).

Geoffrey Porges, Sanford Bernstein.

Good afternoon, thanks for taking the question.

I was wondering if you could give us a little bit more detail on the sequence of events for the production of FLUVIRIN this season?

What if any inspections have already occurred by the FDA and is the June-July a final inspection or a first inspection.

And related to that, what time do you think you're likely to come to market in the flu season given the visibility you now have to yields in your production schedule?

Do you expect to supply product in August, September, October?

What is the distribution likely to be for the season?

Thanks.

This Howard, I will take that.

I think that's three questions.

The history of our interaction with the MHRA and FDA are as follows.

The MHRA had inspected our facility three times leading up to their decision then on March 2 to lift the license suspension.

Since then, we have had one more inspection from the MHRA and we expect one more inspection from the MHRA perhaps, topping an altogether five inspections by the MHRA.

Of the four that have taken place, the FDA participated as observers in two.

The FDA therefore are, as we said in our prepared remarks, are very much internally involved in the process of our getting the input and getting the guidance and getting the feedback on the way that we were implementing our remediation plan.

For the reasons I've described, we've designed a remediation plan that is meant to be comprehensive that is meant to exceed the specific observations for the regulatory agencies to achieve sustainability, so it is inevitable that we knew that there were feedbacks on how we were doing and in the sequence we were doing it that we were looking from the agencies.

And indeed as I've said before, we are pleased and gratified that we receive those kind of input.

The FDA is finalizing their inclusions as to whether or not it will be one inspection or two inspections that form their close-out process with a warning letter.

As a matter of legal definition, they do not need to do the close-out, but as we fully expect given the magnitude of the attention and the intensity of the public health interest on our situation, we have no doubt that it is the right thing for the FDA to be prudent and they have told us that it's in the range of mid-June to mid-July that they would do one or two inspections, and that would form the basis in closing that.

The timing to go to the market depends on how many days of the total elapsed time that is still remaining for us to complete all of the amendments and submissions to reflect the amendments that we've made to our establishment of license, but our plan is to be able to start to ship products in September.

We therefore have no firm allocation as far as the percentage of doses in September versus October as of this point, and as we get closer to the closure we will be in a position to provide that.

That actually is the basis of some discussions that we're starting to have with the CDC who is in the process of trying to figure out how many doses will be available from all of the manufactures at different times, and that in due course our situation will clarify as well.

So thank you for your three questions, Geoff.

Thanks for your answer.

Sapna Srivastava, Morgan Stanley.

Hi, thank you for taking my question.

Could you just explain why FDA is conducting the inspection in June or July versus conducting it earlier so that you will have better clarity before?

And just a second quick question, if you have reviewed your contracts with the distributors and what kind of pricing is associated FLUVIRIN?

Again, I will take those two questions.

The FDA as I had, in the answers I have given to Geoff earlier, have already participated in the underground, as it were, underground observations as to the progress that we were making.

They have been actually right from the start, from mid-October on, been in what we understood to be weekly contact and conference calls with the MHRA.

We have now come to the point after we got the reinstatement of our license in regular contact with the FDA ourselves to make them aware of the progress that we're making.

As I said in the four inspections that the MHRA has conducted, (indiscernible) within MHRA has principal jurisdictions of the establishment.

The FDA has sent inspectors with the observers in two out of those four occasions.

On the fifth inspections that we expect to occur in the next few weeks with the MHRA, we expect the FDA will be observing as well.

So out of the five MHRA inspections, four of which have taken place, we expect the FDA will have observed for three out of those five occasions.

And then I think they will come to the point of saying we now know enough.

This time when we so the final closeout inspection, there will be no surprises.

And I think that has always been the philosophy and the attitude of the FDA towards our situation.

It's not that they're staying away from it, they are just staying very, very close to the situation.

As I said, intense amount of effort on the part of the agency has gone into the oversight, the supervision and the observation and the consultation to our remediation effort.

It's just that I think by the time they do it, that they want to be in a position to do it in one formal inspection as they undertake themselves.

And FDA also has a closeout inspection philosophy that is less episodic, that is more systematic, that is they want to see the entirety of the process so that when we will have in production a few steps into it, we have lots of the products already made.

They will then be in a position to accept all of the systems and all of the processes and all of the changes that we will have made.

So to have that inspection will constitute a sufficient basis for them to (indiscernible) the inspection.

The pricing issue obviously was we're not going to give you the specific numbers.

Suffice it to say that there's a tremendous amount of upper pressure in the short run as GSK may be in the market this year, but there is a natural cap to what we understand to be their supply capability based in Dresden .

ID Biomedical had said that they were hoping to be in the market in 2005 on an IND basis, but that increasingly looks not to be the case.

And Aventis we understand, that is between 55 and 60 million doses that they could supply.

In 2003 as you recall, the number of doses used in the country was 90 million doses.

So there's clearly, clearly for 2005 a substantial supply and demand imbalance, and therefore the price is going up very, very substantially.

And as you know also, reimbursement is good, getting better as we've said.

And so the entire dynamic of the demand side of the flu market is very, very positive with (inaudible).

But for the long run, as I've described, we believe that the supply and demand will mutually enforce each other and they maybe trend to positive.

Suffice it to say that the price that we're receiving that we have now confirmed with our seven distributors all represent substantial increases over '04 and '03.

Thank you.

Jennifer Chao, Deutsche Bank.

Howard, with respect to your comments that there's a clear lack of full visibility on FLUVIRIN's '05 potential, which seems to me to suggest some pragmatism because when I run the numbers on your guidance and if I keep most things steady-state, I get more towards 150 to 165. so I want to just clarify a few things.

With respect to the costs associated with remediation and legal costs, David I did note your comment that you're going to be more heavily loaded in the first half.

On legal costs, should we expect that that's pretty steady-state throughout the whole year?

And then on the remediation costs, is the second quarter going to be similar in proportion to the first?

What we provided obviously was guidance.

We think that the remediation costs, technical remediation to hit the cost of sales line are more first-half oriented obviously as we're working and ramping up with production.

For lots of reasons, we're not projecting forward what we expect the second quarter or beyond that to be and we'll probably have some remediation-related costs that will flow through the rest of the year.

Our margin guidance reflects that type of effect in terms of the kind of low to mid '50s in terms of what that may be.

On the operating expense line, we do expect that will have FLUVIRIN legal related costs over the course of the year.

Obviously, it was about 10 million this quarter, but as counsel -- in-house counsel tells me all the time that it is hard to predict what lawyers will cost over time.

We've tried to reflect that in terms of what our guidance is, in terms of the low or the mid- to high-single digit growth and related operating expenses for the year.

Okay (technical difficulty).

Thomas Wei, Piper Jaffray.

Thanks very much.

The 25 to 30 million doses obviously falls quite a bit shorter previous year's capacity.

Should we think of that as kind of the maximum capacity of this plant on a go-forward basis or is there something about various factors, either an intentional pull-back on your part to manufacture below the throughput of the plan, or a smaller number of eggs ordered or lower yield relative to price strains that might naturally make that number higher in subsequent years?

Thanks.

Thomas, I don't think that we mean to suggest that the 25 to 30 is a permanent capacity of our supply out of Liverpool at all.

For the reasons that I've described, we have undertaken this very comprehensive and extensive remediation and it's sort of like an injured athlete performing, having to go through some major operation and when we come back to run the marathon again, we're not going to be running at full speed right at the beginning of the season.

We're going to get there over time.

And that is why, and as I described already, there are these still remaining loose ends that need to be buttoned up, including the remaining inspections and then the amendments that we are going to make our files, the replenishing (ph) that we have made, etc.

So for all of those reasons, all of those reasons, we are really getting adjusted with our workforce, we're being retrained in the supervisory structure and the management structure in Liverpool that we've nearly installed and the standard operating procedures that are new and even the workflow that has been significantly changed within their facility -- all of those things in product decline, the speed of our start and whether or not we're working at full throughput or output.

So those are the reasons that point us to our current estimation of 25, 30 million doses.

We think that if we are successful with achieving full remediation in closing it out this year, next year we are likely to be in a position to produce more.

Aaron Geist, Robert W. Baird.

Good afternoon, thank you for taking my questions.

Switching gears from FLUVIRIN, can you talk a little bit about the long-term outlook you see for BETASERON due to Tysabri being pulled off the market?

And have you made any changes to your production capabilities?

Aaron, this is Craig Wheeler (ph), President of Biopharmaceuticals Business.

We're currently planning to see some increases in the overall sales of BETASERON.

In the out years, we've taken the forecast down from what we had anticipated would be -- originally would be a launch of Tysabri.

We have production capacity available to be able to meet that full production (indiscernible).

It was available before Tysabri was on the market, and so we had not decreased that production capacity at all.

We don't anticipate to see too much this year as we've anticipated the initial Tysabri launch was going to be going into segments of BETASERON failure.

But as we adjust our projections going forward, we will see some impact from the withdrawal of that product from the market.

Thank you very much.

Alex Hittle, A.G. Edwards.

Thanks for taking the question.

On the flu business looking forward, cell culture seems to be the wave of the future.

And I am wondering, when do you see cell culture really dominating that market?

And in light of that, does the money that you're putting into the Liverpool facility come out sort of the other end with a facility that has some play in that cell culture world?

This is Bruce Scharschmidt.

Let me just comment on the first aspect of that question and just update you with respect to the status of our program.

We have outlined a couple of objectives at the beginning of the year, and those still pertain.

One was to advance the Phase III program that's intended to achieve European registration, and the other is to work with FDA to define a path forward in the U.S.

We are completing the submission that we anticipate will be sent to the agency in the near-term, anticipate more dialogue over the course of the year.

And because our hope would be to bring -- make the product both in Europe and in the U.S., we will factoring regulatory feedback into our plans going forward.

I guess the qualitative answer to the other aspect would be that we don't anticipate that at least the first generation cell culture derived product would be clinically differentiable from egg- based vaccine.

We anticipate that it would be sort of phased into the market over a period that could be 5, 10 years or even beyond.

And when do you see that starting, if I may ask?

We understand that besides ourselves, one other manufacturers is active in making the -- getting in the clinical development, clinical trial in cell culture, and that would be Aventis.

And I think we understand that they are entering into Phase I clinical trial.

Bruce just said that we are entering into Phase III for the European registration and we expect to be able to resolve the clinical hold on our IND with the FDA in the months to come.

We are making the submission to clarify what we think are some of the top task questions that the FDA has asked which constitute a basis of the clinical hold.

And so in the weeks to come -- in the months to come, we ought to be in a position to be able to say something about the timing of our starting the U.S. equivalent of the Phase I study.

There was one of those sources of cell culture of flu that was actively discussed for the U.S. market, and that was the (indiscernible) vax (indiscernible) product where we have (indiscernible) enforced that that product is (indiscernible) for reasons that we don't completely understand.

Thank you.

David Molowa, UBS.

Thank you.

Could you just comment on non-operating income in the quarter and then guidance for the year perhaps?

The number came in I believe, or at least interest income and other north of 20 million and given your current cash balances, that seems like a relatively high number.

Thank you.

Sure.

In terms of what happened in this particular quarter, we have a little bit of an increase and interest income based upon some increasing cash balances.

Cash balances are up a little bit from the prior quarter.

Also as we've talked about in the past, what happens is that we have some equity securities that we have forwards on that we established several years ago and those forwards are scheduled to expire from time to time and we happen to have a few of those expire in this particular quarter.

And that's a little bit then tough in terms of to provide guidance on that particular line item going forward.

Given the nature of when those things expire is not -- it's more on a random basis in terms and when the forwards were scheduled.

So we actually don't provide guidance at that level.

Thank you.

Thomas Wei, Piper Jaffray.

Thanks.

On the FLUVIRIN pricing side, I was under the assumption that Schein was still under a prior multi-year contract.

The price increase that we're seeing for this season that you're able to realize, should we think about as the rest of the wholesalers at an even higher price and Schein under some pre-negotiated lower price based on a prior seasons?

We have, Thomas, we have price increases for all seven of our distributors based on the discussions that have just concluded in the last week or so, and that includes Schein.

Schein's increase was relatively smaller when compared to the other six and the average realizable selling price therefore is still substantially higher than what it would've in '04 had we created a market and certainly substantially higher than '03.

Thanks, and if I could just squeeze in a follow-up on my prior question, I guess ultimately what I was trying to figure out is, it's 25 to 30 million doses and I understand that that's obviously a lot less due to the things that you have going on.

Ultimately, do you think that you can get back to the capacity levels that you were previously predicting, or is there something that's permanent that's going on that will always keep you capped below those historical levels?

I think it's too early for us to make that kind of projection, Thomas.

We ought to go through the season and then we will be in a better position to characterize which muscles have really regained the strength and or the imparity of our legs jumping with full force. (indiscernible) as a sort of textbook answer to your question about total output, you know this I'm sure by heart, it is a function of three things -- yields, the number of eggs, maximum eggs that we are able to process today.

But technically, it's really the average number of eggs we can process today.

And then the number of days we can be in production, which is a function of when can you get started and how long into the season relative to where you see the demand is going to be, is a function of timing.

So those are the three factors -- number of days, number of eggs and number of doses per egg.

And as we finish this season, we will be in the far better position to think about what is the theoretical maximum of our output out of Liverpool.

It's just too early for us to make that kind of forecast.

We have time for one more question.

Geoffrey Porges, Sanford Bernstein.

Great, this is a terrific opportunity.

I wondering if you just could comment on the pricing for the product introductions in the testing business in Europe?

What sort of uptick are you seeing for ULTRIO and TIGRIS, and then what do you anticipate in the U.S., particularly for West Nile and for those other product improvements?

Thanks.

We were very pleased in the first quarter with the adoption rates that we are seeing in Europe for ULTRIO and Tigris.

As you probably know, we have a corporate milestone of better than 50% of our European customers who have been utilizing ULTRIO by year end.

And we're tracking very, very well to accomplish that.

We've also installed a TIGRIS in Rome for an efficiency evaluation as well made our first sale in Europe for Tigris.

So the business drivers that we have identified continue to track very well.

Hopefully, you've also seen the press release about the business that we've picked up in South Africa.

That represents a million donations in the IDT format using both ULTRIO and Tigris.

And the expectation is that they will begin testing late third quarter of this year.

So the adoption rate, the interest in both ULTRIO and TIGRIS is trending very well and we're pleased to say that the pricing that we're getting is well within the targeted range that we have both to our distributors as well as the end customer pricing.

In terms of the U.S. where West Nile is being used, obviously we did submit our BLA in late January of this year.

We are still optimistic that in early 2006 we will get approval for ULTRIO, TIGRIS and West Nile.

And based on that with the current adoption that we have with ULTRIO, we will be able to move quickly to commercial pricing for West Nile.

And then with ULTRIO, because that's not a currently utilized tester in the U.S., we will have the selling activities going on throughout 2006 in order to get penetration with that product.

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

Ms. Dier, are there any closing remarks?

Yes, Howard?

I just want to make a two-pronged closing remark, one about the environment in general and the other about the Company overall.

I just want to say that as you think about our commitment to FLUVIRIN as being entirely motivated by our commitment to the public health.

You should also know that FLUVIRIN is a growth driver for Chiron even in 2005, and revenues from these 25 to 30 million doses we project we will be able to supply will meaningfully exceed our fixed manufacturing costs plus the technical remediation costs at the higher price that we now know we can get.

And in the longer run, we expect FLUVIRIN to be an important contributor to our growth and because we have no doubt in our resolve to be a player in the U.S. flu vaccines market, especially in light of what we believe to be an unprecedented remediation effort and the unprecedented regulatory attention and guidance that we received.

And ultimately, our share in what we believe to the a growing market, we think is going to be shaped by the reliability and the timeliness of our supplies every season from this season on.

And that is why we have undertook the remediation approach we characterized early here for your.

On the Company overall, I want to point out that the past seven months have been a time of intense effort and reaffirm commitment on the part of all our employees.

The remediation effort for Liverpool has begun to bear fruit, thanks in no small measure to the resiliency and determination of our employees, though much of our work remains ahead.

At the same time, there are multiple drivers to growth that are being steadily executed which may address that they also bear fruit in the important medical needs and provide value creation for our shareholders.

And together, these effort portray a company marked by an enduring will to expand the impact that we have on global human health.

So thank you very much.

This concludes today's Chiron Corporation first-quarter 2005 financial earnings conference call.

You may now disconnect.