Novartis AG (NVS) 2005 Q2 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to the Chiron second quarter 2005 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 1 on your telephone keypad.

If you would like to withdraw your question, press star, then the number 2 on your telephone keypad.

Thank you.

I would now like to turn the call over to Ms. Mardi Dier, Vice President of Investor Relations.

Ms. Dier, you may begin.

Thank you, Michael.

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

I'm Mardi Dier from Investor Relations.

On behalf of the Chiron team, I would like to introduce you to our principal speakers on today's call: Howard Pien, Chairman and CEO, and David Smith, Chiron's CFO.

Joining us today for the Q&A on today's call are Gene Walther, President of Chiron Blood Testing, Dan Soland, President of Chiron Vaccines, Stephen Dilly, Senior Vice President of Biopharmaceutical Development, and Bruce Scharschmidt, Vice President, Corporate Scientific Affairs.

Before we begin, let me remind you that our remarks today will include forward-looking statements relating to future events and the performance of the Company.

These forward-looking statements involve risks and uncertainties and actual results may differ materially from those expressed or implied herein.

We refer you to the documents that the Company has filed with the Securities and Exchange Commission, including our 2004 10-K, our first quarter 10-Q and our upcoming 10-Q for the second quarter, as well as our second quarter earnings release that we issued earlier today for a discussion of 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 are providing today.

Please note that we present our financial results on both an as-reported GAAP and as-adjusted basis.

Where we indicate a number to be objective in today's discussion or otherwise refer 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 certain adjusted numbers to GAAP is attached to the second quarter earnings release.

Now, I'll turn the call over to Howard.

Thanks, Mardi.

Good afternoon and thank you all for joining our call.

Today I will discuss the drivers for growth in our Blood Testing and BioPharma businesses followed by an update on FLUVIRIN remediation as well as the situation with BEGRIVAC.

David will then follow with a more detailed discussion of our financial results.

Afterwards we will be glad to answer your questions.

As we move into the second half of the year, we are motivated by three priorities that are guiding us.

One, we continue to progress on FLUVIRIN remediation and we are determined in our efforts to return to the U.S. flu vaccine market.

Two, we continue to make progress on our short-term milestones which include new assays, automation and geographic expansion in the blood testing business and CUBICIN in BioPharma.

Together with FLUVIRIN, these represent five short-term growth opportunities.

And three, we are also continuing to progress towards our long-term growth drivers and most notably is the progress that we are making in the productivity of the BioPharma pipeline.

As we focus on these priorities, Chiron's business remains fundamentally sound.

We had a 10% increase in revenues in the second quarter compared to the same period last year and we are executing on programs in all of our businesses that we expect to drive growth.

Let me start with lood testing.

Chiron Blood Testing offers multiple opportunities for new term growth from new assays, from automation with the PROCLEIX TIGRIS system and with geographic expansion.

We have been pleased with the continued penetration in Europe of PROCLEIX ULTRIO assay which adds the hepatitis B assay to the current HIV-1/HepC assay, and we are closing in on our corporate milestone of 50% percent conversion to ULTRIO in Europe this year.

Data presented at the European Congress of the International Society of Blood Transfusion highlight the importance of ULTRIO in countries where it has been adopted.

According to a study conducted by Dr. Emma Castro of Spanish Red Cross in Madrid, ULTRIO detected two hepatitis B positive blood donations from a base of 20,000 tested that would otherwise have gone undetected by previously approved assays.

Yields from ULTRIO in the European Union are exceeding our expectations.

So far, we have seen more than 60 potential yield cases in a base of 650,000 samples tested.

We believe this bodes well for the U.S. market and underscores the potential of this new test for keeping the blood supply safe.

We expect approval from the FDA to market the ULTRIO assay in the United States by early next year.

Based on our experience with the EU rollout of ULTRIO, we anticipate that conversion here will follow a similarly steady path.

Chiron and our collaborator, Gen-Probe, developed ULTRIO and TIGRIS with significant input from our customers to address their needs for a safer blood supply and a more efficient laboratory testing operation.

We believe that together the ULTRIO and TIGRIS provide the optimal combination of assay performance and automation enabling customers to move towards individual donor testing.

Our customers' interest continues to be strong, as is reflected in that we have placed 26 TIGRIS systems to date worldwide of which 11 are in the U.S.

In addition to ULTRIO and TIGRIS, we also await FDA approval for the PROCLEIX West Nile virus assay which we expect in early 2006.

Just as new assays in automation are helping to drive growth in blood testing, so is geographic expansion.

We’ve set as a milestone this year for entry into four new countries and we are on track to reach that milestone.

As you know, testing with ULTRIO and TIGRIS is expected to begin in the fourth quarter in South Africa where 1 million donations are screened annually.

We have also converted Israel to NAT with approximately 275,000 donations annually.

Now, let me turn to BioPharma.

Two weeks ago, the FDA issued an approval letter for PULMINIQ, or cyclosporine for inhalation, for the indication of preventing chronic lung transplant rejections, but the approvable letter stipulated that an additional study needs to be done prior to approval.

We are now evaluating possible next steps.

That said, we are proud of the hard work that has been taking place and has taken us this far.

We believed when we licensed this product that the previous study demonstrated significant mortality reduction benefit and that PULMINIQ has valuable long-term potential.

We still believe that now.

However, if we determine that we will not proceed with further registration work because it is impractical , that decision will have no adverse short-term profit impact on Chiron.

We have another growth opportunity ahead of us in our BioPharma business in the short run.

We are awaiting approval from the EMEA to market CUBICIN, or daptomycin for injection which we licensed from Cubist, from the EU, for complicated skin and soft tissue infections.

Last month, Cubist announced positive results from its trial in endocarditis and bacteremia.

We are hopeful that this data will be useful in expanding CUBICIN's label, post the initial approval in the EU.

Enrollment is on track for our Phase III study of Tifacogin for severe community acquired pneumonia.

The Data Monitoring Committee will undertake an interim evaluation for safety and for futility towards the end of this year but the data will remain blinded to us at Chiron.

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

We also continue to make excellent progress with our oncology franchise with the initiation of Phase I testing of CHIR-12.12 in patients with multiple myeloma.

This is in addition to our ongoing Phase I in chronic lymphocytic leukemia.

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

Our milestone for this year is to select among these the first indication and the dosing regimen for Phase II development.

Now, to BEGRIVAC which is marketed outside the United States, principally in Europe.

As you know now, spores were detected through our internal quality tests and also noting the product did not meet sterility specifications.

We are working with the German regulatory authority to mitigate the effect of the disruption in Germany and we are also working closely with a German agency on additional sets.

Our goal is to be back on the market with BEGRIVAC next year.

Now, on to FLUVIRIN.

Last week, the FDA completed a 9 day on-site full GMP inspection of our Liverpool facility which is an important milestone in our remediation effort.

We expect to provide responses to the FDA on the so-called 483 observations in early August and we expect that the FDA will then make its determination on whether we have satisfied the issues raised in their warning letter from the previous year.

We can't and we wouldn't want to characterize the outcome of the inspection until we hear from the agency of its conclusion.

I reiterate our profound gratitude to both the FDA and the MHRA for the extraordinary guidance and unprecedented collaboration since we embarked on this remediation plan nine months ago.

Production of FLUVIRIN is currently underway.

We have been producing monovalent bulks for many weeks and expect to begin trivalent blending and filling imminently.

We have projected our total output to be between 18 million and 26 million doses.

We remain comfortable with that output projection.

The projection, of course, assumes that we’re able to receive a favorable conclusion from the FDA on the expected outcome, that we encounter no further adverse manufacturing or regulatory development and that we fulfill the subsequent supplemental, regulatory and lot release requirements in a timely manner with the FDA while maintaining our current projections on yield throughput and length of production season.

We have received commitments from our distributor network for all of the doses of FLUVIRIN and currently project to produce, assuming we are able to deliver doses in a timely manner.

We now have ongoing distribution agreements in place with six distributors and we are optimistic that we can complete agreement with a seventh.

Now, I would like to turn the call over to David for a detailed discussion of our financial results and financial expectations.

Thanks, Howard.

I'll begin with the review of the results for the quarter which were released earlier today.

All earnings per share amounts that I'll be discussing today refer to the adjusted diluted per share earnings unless otherwise noted.

As we discussed previously, we present our financial results on both an as-reported GAAP basis and an adjusted basis.

The adjustments we made this quarter and in the second quarter of 2004 to arrive at adjusted earnings consist of the amortization expense on acquired identifiable intangible assets related to acquisitions.

In certain instances, I will also provide you in the call with an idea of the impact of FLUVIRIN remediation costs, our incremental idle facility charge and the BEGRIVAC inventory write-off on gross profit and adjusted earnings per share and what our vaccines and overall gross margins would have been without these charges.

A reconciliation between our GAAP and adjusted results and between our GAAP and adjusted results as further modified to reflect the impact of these matters can be found on our website in the investors section under financial reports.

For the second quarter of 2005, Chiron reported adjusted income from continuing operations of $16 million or $0.08 per share.

Chiron’s adjusted earnings as restated were $0.20 per share in the second quarter of 2004.

The suspension of our license in the Liverpool facility and related remediation expenses and the writeoff of our BEGRIVAC product inventory had a $0.15 impact on the results for the quarter.

I will discuss this impact in more detail later in my comments.

Total revenues for the second quarter of 2005 increased 10% to $419 million from $380 million for the same period in 2004.

Product sales increased 8% to $304 million from $281 million.

The effect of foreign exchange rates in the second quarter was a 1% increase in total revenues.

Increases in product sales were primarily seen in travel vaccines, meningococcal vaccines, BETASERON, TOBI, and PROCLEIX, offset by declines in pediatric and other vaccines, flu vaccines and PROLEUKIN.

Revenues from the joint business arrangement with Ortho were up 9% over Q2 2004 primarily due to higher profits from Ortho's foreign affiliates.

Royalty and license fee revenues were up 39%, primarily due to our Q3 2004 settlement agreement with Roche regarding our HIV patents in the United States, increased BETAFERON royalties and our settlement agreement with the Scottish National Blood Service in the current quarter.

Gross margins decreased to 42% from last year's gross margin of 54%, primarily driven by the decline in the gross margin for the vaccines business due to FLUVIRIN related costs and the BEGRIVAC inventory write-off which I will detail later in my comments.

Overall gross margins were also impacted by a reduction in the biopharmaceutical gross margin due primarily to increases in planned idle facility time and ongoing process improvement efforts over the second quarter of 2004.

Research and development expenses for the second quarter of 2005 totaled $107 million, up 7% from the second quarter of 2004.

The increase is primarily related to the development efforts in our oncology franchise, in our meningococcal franchise and for CUBICIN.

This increase was partially offset by programs that have been discontinued prior to the second quarter of 2005.

In addition the second quarter of 2004 included higher costs for Tifacogin due to production of clinical materials for the Phase III trial that commenced in the second quarter of 2004.

SG&A expenses for the second quarter of 2005 totaled $128 million, up 20% from the second quarter of 2004.

In the second quarter of 2005, there were approximately $5 million in legal costs related to the FLUVIRIN related development. $2 million of the increase was also due to the effect of foreign exchange rate.

The remaining 13% increase in SG&A reflects a broad range of activities, significant among them ongoing marketing and pre-launch programs for CUBICIN and PULMINIQ, investment in geographic penetration and corporate benefits.

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

Blood testing total revenues increased to $133 million in the second quarter of 2005 from $115 million in the year-ago period, a 16% increase.

This increase was primarily due to the higher product sales of PROCLEIX NAT 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.

PROCLEIX NAT sales increased 9% over the second quarter of 2004 due to the introduction of our PROCLEIX ULTRIO assay outside of the United States and continued penetration into several markets abroad.

Testing royalty and license fees increased $10 million in the second quarter of 2005 reflecting settlements from agreements that were entered into in the latter half of 2004.

The total also reflects our settlement agreement with the Scottish National Blood Service.

In addition, Roche royalties increased due to payments of a higher rate because of certain countries entered into the European Union and because of an increase in reported donations.

Turning now to vaccines.

Second quarter of 2005, total product sales for the vaccines business were $97 million versus $87 million in the same period last year.

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

Sales of our travel vaccines were 45 million in the second quarter, up 71% from the year ago period.

Our TBE vaccines and rabies vaccines showed an increase.

Our TBE vaccines and rabies vaccines drove the increase.

Our TBE vaccines had an additional $17 million of sales in the second quarter of 2005 driven by overall market growth and a number of marketing initiatives that increased our market share.

In addition, there were increased demands for our rabies vaccines in the UK, primarily due to a product recall from a competitor.

Our second quarter meningococcal vaccine sales were up 9 million, primarily as a result of sales of MENZB meningococcal B vaccine, to the Ministry of Health in New Zealand.

Sales of pediatric and other vaccines were 39 million in the second quarter of 2005, down 18% from the year-ago period.

The decrease was largely driven by a decline in sales of our MMR vaccine.

The second quarter of 2004 included a large-scale MMR vaccine campaign.

Sales of our polio vaccines were also down, driven by the tender nature of our business.

These decreases are partially offset by increased DTP sales to GSK.

Gross profit for vaccines decreased to 7% from last year's gross margins of 34%.

As we said, costs related to FLUVIRIN remediation and the BEGRIVAC write-off materially impacted margins for vaccines.

Moving to our third business, biopharmaceuticals.

Total biopharmaceuticals product revenues were $132 million in the second quarter of 2005, up from $127 million over the year-ago quarter, a 4% increase.

We saw increases in BETASERON and TOBI sales while PROLEUKIN sales declined.

Second quarter sales of BETASERON were 38 million, up 21% from the year-ago period, primarily due to inventory ordering patterns and price increases.

BETAFERON royalties were 17 million in the second quarter of 2005 compared to 12 million in the second quarter of 2004, an increase of 46%.

The increase was primarily the result of increased pricing and demand.

Our second quarter TOBI sales were $57 million, up 10% from the year-ago period primarily due to increased patient demand in the United States and price increases offset by wholesale ordering patterns.

Second quarter sales of PROLEUKIN were $32 million, down 10% from the year-ago period, primarily due to increased patient demand in the US as a result of increased competition in the low dose sector, a rebate adjustment and wholesale ordering patterns partially offset by price increases.

Gross margins in the biopharmaceuticals segment increased to 68% from last year's gross margins of 74%.

The decrease was primarily a result of increases in planned idle facility time and ongoing process improvement efforts over the second quarter of 2004.

I would like to take some time to discuss the financial impact of the FLUVIRIN remediation and related costs as well as the write-off of the BEGRIVAC inventory on gross margin and adjusted earnings per share for the second quarter of 2005.

Second quarter of 2005 vaccines gross margins were impacted by three items.

Incremental idle facility charge of 14 million, higher than the second quarter of 2004 as a result of limited production of FLUVIRIN in the second quarter.

FLUVIRIN remediation costs of 8 million and the BEGRIVAC inventory write-off of 15 million.

In aggregate, these three charges had a $37 million impact on gross profit.

Without these charges, vaccines gross margins in the second quarter of 2005 would have been 44% as compared to 34% in the second quarter of 2004.

Overall Company gross margins would have been 54%, the same as second quarter of 2004.

In aggregate these charges had an impact on adjusted earnings per share of $0.15 in the second quarter of 2005.

I also wanted to take a minute to address the financial impact of not supplying BEGRIVAC in 2005 and the offsetting measures we expect to implement so that we remain comfortable that 2005 earnings will be within our current financial guidance for adjusted earnings per share of $1.20 to $1.45.

As Howard discussed, we expect to offset the impact of not supplying BEGRIVAC this year by reallocating non-US flu doses manufactured in our Siena facility to the affected markets.

We also expect to supply the affected markets with incremental doses of flu from our Siena facility.

We believe that the successful integration of these actions will make up a significant portion of the offset.

We will also be reducing our noncritical spending for the rest of the year.

By implementing these offsetting activities we believe we remain within our stated guidance.

As I conclude, I would like to remind you that our stated guidance reflects the range of doses of FLUVIRIN we believe we can deliver to the US market this year assuming we clear all remaining regulatory and remediation hurdles Howard spoke to earlier, and that we encounter no further adverse manufacturing or regulatory developments.

As we stated, we believe that we are still in a position to supply 18 to 26 million doses for the 2005-2006 influenza season.

With that, I will turn the call over to Mardi for Q&A.

Thanks, David.

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

I'd like to remind you to please limit yourself to one question per caller, and with that, I'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 keypad.

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

Your first question comes from Eric Schmidt with SG Cowen.

Good afternoon.

My question is on ULTRIO pricing and maybe even on West Nile pricing if you would be willing to comment.

Specifically on ULTRIO pricing, could you talk about what type of pricing now you have been able to achieve in Europe and what your expectation is for the U.S. and again, maybe you can comment on West Nile in the U.S. as well.

Sure, this is Gene.

In terms of ULTRIO pricing in the EU market, I think as we reported before, we are well within the target areas that we have identified.

On duplex, we have noted a $10 to $15 range and are getting a premium in excess of that $10 to $15, somewhere in the neighborhood of say, 30%, 35%, over that target and we are hopeful that when we finally get FDA approval early next year that we will be able to have pricing in a similar range here in the U.S.

As it relates to West Nile, as you know, we are currently under cost recovery.

We are also expecting early 2006 FDA approval there.

We will be moving to commercial pricing as quickly as we can following that and we would expect to have a price increase similar in the range of what we were able to do when we moved from cost recovery to commercial pricing, I guess it was three years ago now, which was in the neighborhood of probably, I guess it was about 50 to 75% type increase.

Thanks a lot.

Your next question comes from Rachel McMinn with Piper Jaffray.

Thanks very much.

It sounds like you are affirming your EPS guidance for the year but do you have any specific color on what you are doing with your top line and operating expense guidance?

I guess one line item in particular that I'm curious about is your blood testing guidance of mid teens growth.

It looks like you would have to have significant acceleration in the second half to meet that.

Thanks.

Rachel, it's David.

We are currently comfortable with our guidance of $1.20 to $1.45 on an adjusted EPS basis.

We haven't given a lot of color on the rest of our guidance.

I think we're comfortable at this point in time where it comes out with blood testing and the guidance that we provided as it relates to NAT at this point in time.

So we should assume that your previous revenue guidance and operating expense guidance might be shifted around a little bit to meet your EPS guidance?

Yes, we have talked about we have obviously taken a bit of a hit with the BEGRIVAC and we are doing to the tune of about $60 million of operating income loss, including the 15 million that we took a charge for in this quarter, and we are taking steps to mitigate that, as we talked about with the reallocation of doses and getting new doses out of the Siena facility.

It appears we'll have more and then also by expense management.

So those are the types of things.

So we'll see a little bit of movement in and around but we're comfortable with the guidance that we provided back in June on the bottom line.

Thanks very much.

Your next question comes from Tom Shrader with Harris Nesbitt.

Thanks for taking the question, I wanted to ask about the 483 observations you got from the FDA.

It is my understanding that the MHRA had done five inspections and the FDA was there for each of those and then when they did their own inspection they came up with new observations or were these all things you talked about with the MHRA before?

Tom, the MHRA has done five inspections, you're right.

If I remember correctly, FDA were present as observers in at least three.

I think it is three out of the five.

Okay.

And MHRA, of course, when they do their inspections, they make their observations to the FDA or as it were guests.

And FDA has its own inspection process with different kinds of emphasis so they came and conducted their own inspection.

The MHRA inspectors observed on the FDA inspection that just completed this 9-day inspection that just concluded and the process is that they spend time and look at documents and look at operation of the client, look at the different quality systems, look at the papers, the documentation, and then they put together a list of observations and then they want us to go through the observations and respond and provide a response to those observations which is what we are now in the process of doing.

We aim to be able to respond to those observations sometime in the first -- in the next couple of weeks or so in the first -- certainly the first half of August, and then the process would dictate that the FDA would then have a group of people who will look at the inspectors' reports and their observations from the 483 form and they will look at our responses and they will come to a conclusion.

But they are interested in different things than the MHRA?

It seems odd.

It doesn't seem odd to us.

I think that they do see quite a bit of each other's processes but they have different orientations and different emphasis.

Okay.

Okay.

Thanks.

Sure thing.

Your next question comes from Geoff Porges with Bernstein.

Hi, thanks for taking the question.

You mentioned that the ULTRIO penetration in Europe is likely to resemble the penetration that we will see here for ULTRIO post-launch.

Can you give us some color on how that will work in the United States?

So will ULTRIO adoption require adoption of TIGRIS as well or will the ULTRIO assays be able to be run on the older eSAS platforms and if so, will customers still have the option to retain the duplex PROCLEIX if they choose to and not go to the HBV test until the FDA perhaps requires it?

I'll try to knock those off, Geoff, as you listed them.

I think that the first point is that we anticipate that the U.S. adoption for ULTRIO or the addition of the HBV analyte will follow a similar path as it did in the EU, where we had roughly 30% in the first year, 50% in the second year.

The ratios, obviously, will be slightly different because, in Europe, we have a more decentralized market than we have here in the U.S. and so we will probably see penetration go in stepwise fashion.

As you may know, we already have a couple of accounts that recognize the need to do HBV testing and are actually using our discriminatory HBV tests under the IND.

So obviously those folks are likely to convert very quickly upon FDA approval and then there are several other accounts that are waiting to gain the benefit of the three in one aspects of ULTRIO as well as the automation on TIGRIS.

We think in the first year we will see somewhere in that 20 to 30% range and I think some of the other accounts, some of the larger accounts we're going to have to work a little bit longer in terms of the sales cycle being able to work through some of the issues that they're going to face in terms of bringing up a system like this on a very large-scale and that is why we think that it will take another year or two beyond that to necessarily see full implementation but most of the customers that we have spoken with in the U.S. have indicated it is really not a matter of if HPV testing will be done, but it's more a matter of when.

So I think if you look at that 2 to 3 year time horizon, we're very likely to see the conversion in that time frame.

The other thing is that that is sort of the time frame the FDA will typically operate before we would see a mandate or a very strong guidance from the Agency.

In terms of, I think, the second question, is that we will continue to offer Duplex.

We had no intention of discontinuing the availability of Duplex.

Not only will there be certain customers in the U.S. that may opt to stay on that platform until there is a mandatory requirement.

But also, outside of the U.S., there are many developing countries that either can't or are unable to, for a variety of reasons, move to the ULTRIO product and we will continue to supply them with Duplex well into the future.

Will everybody running the triplex be running that on TIGRIS?

The ULTRIO assay can be run on either the TIGRIS or the eSAS platform.

So if their volume warrants or justifies TIGRIS, then we would expect that that would be the ultimate solution and the majority of folks, certainly in the U.S. because of the volume of donations done, and a simpleization of testing, we would expect, at least in the US, a majority of those sites would be in the ULTRIO TIGRIS platform.

Thanks a lot.

You're welcome.

Your next question comes from Craig Parker with Lehman Brothers.

Hi, can I first just get some clarification on the answer to Eric's question?

The 30% premium in the EU, I assume, was a premium to the duplex pricing and the 50 to 75% premium in the US was a premium to the cost recovery portion of the pricing, is that right?

That's right, Craig.

Okay.

So my question is for David on the price increases.

Do you have a calculation for the net effect of price increases on sales or if not, sort of the important or material price increases by product.

Not with me, Craig.

I'll call you back after that.

Maybe I could ask another question then.

Management of IL-2 sales.

It seems like we are seeing the tip of the iceberg on some of the investigational agents being used.

Is that your view that the approval of new agents in renal cell carcinoma is going to impact IL-2, and if so, how are you managing that?

We are managing that by focusing on the clear picture of efficacy with high dose PROLEUKIN.

What's really emerged is that high dose PROLEUKIN has an unsurpassed efficacy profile and our main strategy is now to identify the patients that will benefit in order to make the toxicity profile better.

When we talked to the clinicians treating renal cell, already some of the shine has gone off some of the newer agents in that they are seeing good tolerability but they're also realizing increasingly that the prolongation of time to progression is modest and the only agent that gives long-term complete responses that can be classified as cured, in some cases, is PROLEUKIN and so all of that identifying the patients who will benefit and that really played out in terms of what is happening in the market right now.

The high dose usage is growing as we see the low dose, subcutaneous usage, being eroded by the newer agents.

And we expect that trend to continue and soon we expect to hit a plateau where the high dose becomes very much the dominant part of our market.

Okay.

Thanks for those details, Steven.

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

Yes.

I was wondering a little bit about these charges, in particular the idle facility charge.

Is that essentially expenses on your facilities that normally would be enclosed or encaptured by cost of goods in the second half of the year?

In other words, are these expenses that are really just being pulled into the second quarter and now won't show up in the back half of the year or is this actual money that is gone for good?

Alex, it is actually what we would normally be inventorying depending upon the level of production that we would be in, so it's either a period charge or goes into inventory so you are right in the respect that you wouldn't see this in the back half of the year, where had we been in a higher state of production, it would have run through COGS as we were selling product.

Okay.

So it would be fair then to expect a decent or even unusually strong COGS margins in the back half of the year on the flu business?

No, I wouldn't necessarily say that.

You are still absorbing, you know, portions of the facility through COGS during the particular period in the second part of the year and it also depends upon your production levels as well.

So your COGS, if you are at a higher level of production, your COGS will look better.

If you're lower levels of production, then your COGS aren't going to look as good because you are spreading a fixed cost over a smaller base.

I wouldn't consider that the COGS for the FLUVIRIN would look disproportionately better because of the pull in of the second quarter on the idle facility.

Thank you.

Your next question comes from Steven Harr with Morgan Stanley.

It is actually Jason Chang calling on his behalf.

I was wondering if you might be able to comment more on the strategy side if the Company still has plans for licensing or acquisitions and more specifically, are there particular therapeutic areas that you are looking at or is this something that the Company is still considering right now?

We are not going to comment on any transactions that we contemplate but have not made a decision upon.

We do have a -- we do have a fairly strong adherence to what we have been doing in terms of identifying goals and milestones that will harvest the strength of sciences but making sure that is in a targeted way.

Strengthening the ability for us to predictably reach those milestones which we publicized at the beginning of the year.

That is still very much the mainstay of the activities of our management team and of our divisions and business units.

We will always look at opportunities where there are deals to be done that represent a good longer term value creation opportunities but -- but we are not -- we are not thinking about major transformative deals.

And then secondly if you might be able to provide kind of the status of where the tetravalent meningococcal vaccine program is, where it is right now, and what other milestones you're expecting from now until the end of the year.

We have Dan Soland on the line.

Dan, would you like to comment on that?

Just that we're anticipating further data on our quadravalent prior to the end of the year and we will be making further decisions going forward into this year and next.

Great.

Thank you.

Your next question comes from Jennifer Chao with Deutsche Bank.

Back on the blood testing business.

Maybe you can just give us more granularity on what the typical contract period for either the eSAS or the TIGRIS platforms are.

What percentage of customers, perhaps, have signed contracts which are going to carry through into 2006, more on how those mechanics work.

And then also if you could just give us some impression on the interest level for TIGRIS in new geographic regions.

Are we seeing any major progress such as markets like China?

I'll try to weave those three together, Jennifer.

In terms of contracts, they really vary by country.

Some countries, because many of these are government funded, are only allowed to enter one year contracts.

Where we can, we try to enter multiyear agreements, both for our protection as well as the protection that that gives to the customer.

I would say that the range is anywhere from one year contracts up to about five year term contracts so in many of the areas we have contracts that last another two and a half to three years.

And others are annual renewals.

In terms of TIGRIS interest, I think as you may recall from Howard's comments, we placed 26 instruments now globally and we have 11 installed in the U.S. under the West Nile virus IND.

In fact, a 12th one is being installed as we speak.

We continue to install TIGRIS systems both here in the U.S. preapproval and we've had, I think, it's 85 customers from 10 countries that have now visited our facility in Paris and the bulk of the remaining installations have been in Europe.

We have a couple installed now in Asia-Pacific and also, as you know, in South Africa where they are scheduled to go live very early fourth quarter of next year.

So interest continues to be very strong.

There is a high need, high demand for automation.

Obviously this is the most automated NAT system that is out there or perceived to be there for some time to come.

Interest in automation and in TIGRIS continues to run quite strong.

In terms of China, China is really the initial registration submission was for duplex, not for ULTRIO, and did not include TIGRIS.

As we reported I think in the past, we submitted that roughly over a year, a little over a year ago and we're still working with the FDA in terms of answering questions that they may have with hopes of getting approval fairly soon but when it is a regulatory situation, difficult to predict, especially in some of the Asian countries.

Can you just give us a sense of whether or not you are ahead of your own internal projections in terms of where you are on the year for new contracts?

We don't necessarily measure the business on a contract basis.

I think, in terms of revenue, as we projected, we are on track for mid teen NAT product sales.

We are running behind that now but, as you know, it takes a long protocycle.

Many of the sites we are at right now are actually doing facility improvements, plant improvements and so on, and we anticipate those revenues beginning in the third and fourth quarter such that we believe we will achieve our mid teen target for net product sales.

Great, thanks.

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

Hi.

Can you talk a bit more about the PROLEUKIN market?

For example, how many of the percent of sales is derived from melanoma and how many percent of the current sales is from high dose usage and what is the cost for therapy for high dose versus low dose?

Stephen here again.

Currently we have got about a 60-40 split in terms of renal versus melanoma, in terms of PROLEUKIN usage.

The lines for the usage, if you look at the overall revenues from high dose use versus low dose use, they are either crossed or extremely close to crossing now, which is to say the low dose use going down and the high dose use coming up.

That is why I'm projecting that we probably get the asymptote now, and it is up to us to identify our biomarker and I think we’ve talked before about us pursuing the CA9 biomarker quite aggressively right now and other ways of identifying patients so that we can really cement our position in the high dose centers and start to grow the product again.

And the cost of therapy?

The cost of therapy is about $2,000 a course and that goes to four courses is our projection for each patient so that is $8,000 total.

That is for the high dose?

Yes.

Thank you.

Your next question comes from Tom Shrader with Harris Nesbitt.

I was wondering if you could walk us through your thinking about getting bacteremia data into the CUBICIN label and maybe different strategies.

How they would affect pricing.

I know that was a concern before.

Where do you stand on all that now?

Okay, so the first thing is we have got the complicated skin and soft tissue infection application into the centralized procedure.

We have answered the 120 day questions so the clock has started again.

We are looking for a CHMP opinion around the end of this year which would facilitate approval and launch at the beginning of next year.

We are going to use the endocarditis bacteremia data in two ways.

One of them is the ability to answer questions on the current file because the reassuring thing is that there is a good safety profile (multiple speakers).

Right, right.

So we can use it that way.

The day that we get approval for the current indication, we will file for the supplementary indication.

It is absolutely clear that we will be filing for endocarditis but the question is can we also call out a bacteremia (multiple speakers) and that will depend on the power of the signal in the individual pathogen sub group.

We know there is a strong sub group with MRSA in the study and what we're doing right now is going through the data and saying will that support an individual application in its own right and we will work through those data in the next two to three months.

But you are certain the filings will be sequential?

Yes.

That's predicated on things going according to plan with the current filing.

We will file in the beginning of next year.

Okay.

Thanks.

Stephen, we may just add that there are active assessments as to the reimbursement pricing that will be obtained on a country by country basis and if it turns out that we think the price is unfairly low in certain countries due to just the first claim, we may decide not to launch in those countries until the -- until the second claim is obtained.

Your next question from Russell Gilbertson with Caris and Company.

Thanks for taking my question.

Regarding FLUVIRIN, could you just give us an idea of the stage of production?

Have you completed the blending process of valencies?

Are you in the fill and finish process and what do you see as the potential hurdle to delivery of products in September besides the FDA approval?

We are -- we are going into the trivalent blending imminently so that is where we are.

We are before filling and finishing.

We are finishing up, however, the validation process of all of the changes that we made due to this comprehensive remediation plan with workflow and equipment and incidentally the secondary manufacturing is a fairly new set of, new part of the facility.

So it is a matter of going through the ramping up process, making sure that all of the substantial changes that were made are operating well, operating smoothly, and, of course, we have, as we noted in our prepared comments before, we do have a regulatory, supplemental regulatory approval part of this process that is going on as well.

As we -- as we go to the different stages of the manufacturing process, we are generating data that assists the validation of these new processes that we put in and the data we need to make the supplemental submission to append or amend or amplify our product manufacturing license with the FDA.

And so those are the steps along the way.

Thanks for answering my question.

Sure.

Your next question comes from Geoff Porges with Bernstein.

Thanks for taking the follow-up question.

My apologies for juggling calls here.

A follow-up question on TIGRIS and the sort of assays there.

Could you give us a sense of the current reliability of the TIGRIS systems, the 11 that you have currently have placed in the U.S. and those in Europe?

How much down time do you have right now?

We are, frankly, hearing that there's some issues with reliability in service right now and what do you need to get to for that reliability to be commercially viable and then secondly related to that, what do you think is a reasonable sort of estimated conversion rate for the U.S. market once you get the approval of the TIGRIS, say over the first two or three years, and is it reasonable to expect that you get to 100% or is it likely to get to sort of 50 or 75%.

Thanks.

Sure, Geoff.

I think the important thing to mention first about TIGRIS is where we are and what has preceded us.

If we could turn the hands of time back about a year ago, there was great concern, as you might recall, over the West Nile virus epidemic and a need from many areas to do individual donor testing and there was no way they were going to be able to have the facilities and the manpower by which to manage those logistics without an automated platform.

So we, in an accelerated fashion, put TIGRIS out there before it was approved and before we had really finalized much of the development work in the R&D lab and as such we are finding some real time areas for modification that we otherwise might have found had we still been in the development lab.

To that point, some of the things we are hearing are some of the bugs, if you will, that need to be worked out and are typically worked out during a development process.

But we're learning from that.

We are making changes and revisions, both hardware and software, that are giving us very positive trend lines in terms of improvement of the reliability in the meantime between failure.

Some of the instruments that we installed outside of the U.S., where we were able to release those initially with the latest set of firmware and hardware, we are seeing a very good reliability.

How good is it?

We're trying to measure it.

Each of our customers measures them differently.

Is it based on operating hours, is it based on hours of availability, etc.

I think that the progress is going quite well.

Many of the customers will tell you that they love it even though they know that we’ve had down time.

They really don't want to let it go.

So I think that once we can make some of the final changes in some of the software, we are quite encouraged by our ability to get to a commercially viable system that meets the reliability needs both from the customer's perspective and also from our perspective in terms of ability to support and service the instrument.

To your second part, I think as I mentioned earlier, we -- because of the larger customers here in the U.S., we think that we will be somewhere in that 20 to 30% ULTRIO adoption in the first year post approval, and then I think over the next three years, our hope would be that we would see full conversion to ULTRIO in the United States.

But you know, what exactly that curve looks like is really going to be a function of where some of these large customers are and the time frame in which they might adopt the ULTRIO assay.

I'm sorry, Gene, but does that imply -- adoption of ULTRIO implies adoption of TIGRIS anonymously (ph) with that and IDT?

Not necessarily.

I think that one of the drivers that's behind ULTRIO and frankly the need for TIGRIS is the HBV sensitivity issue and just the nature and the science and the doubling time of HBV and in much of the market research that we have done, two, three, four years ago, the market told us loud and clear that they needed to go to smaller pools to maximize the sensitivity for HBV but also for HIV as well.

I think that the sensitivity issue is really driving smaller pool sizes.

Whether it will go down to pools of one or pools of four, I think is yet to be determined and that is why I'm somewhat hedging the time frame, Geoff, because I think a lot of that is going to have to be worked out in real time once ULTRIO is approved and once we've had some real time testing in the marketplace with clinical samples.

Okay.

Thanks very much.

We have time for one more question, please.

Your final question comes from May-Kin Ho with Goldman Sachs.

Thanks for the time.

My understanding is that BEGRIVAC used to be about one third of the Chiron produced vaccines outside of Liverpool.

Is that the right way to think about it for this year as well, meaning that you mentioned previously that you essentially lost $60 million in sales because of the manufacturing issue so can we assume that Siena was supplying about 120 million?

On a dose basis, it is about one third for BEGRIVAC and two thirds coming out of the Siena facility.

It will be different on a pricing basis for different markets as Aggrecol (ph) is applied differently than BEGRIVAC is in certain markets.

So you're saying that the pricing for the Siena produced material is lower than BEGRIVAC?

In the normal markets that it goes to.

So again, because of the reallocation, we're going to see a different mix in pricing so it may or may not be roughly one third/two thirds as you would have thought of it historically.

Thank you.

I would just add that we are shifting products around a bit, [INDISCERNIBLE ] in Germany we are shifting products that were designated for other markets around a little bit so the mix by the time it is all settled as far as price and volume will be a little different.

Let me just add one point to Geoff Parker's question earlier in terms of, in terms of pricing.

The most recent price increases that we have had for PROLEUKIN in the U.S. were 3% in June, TOBI was 7.5% price increase in June, and the most recent BETASERON price increase that Berlex took is 8% back, I believe in late 2004.

That concludes our question and answer period and I would like to turn the call over to Howard for closing remarks.

Okay.

We experienced both set backs and progress during this last quarter and thanks to the hard work of many, the remediation effort in Liverpool has made significant strides.

We are also seeing multiple drivers of growth that are being steadily executed in our businesses.

We will continue to apply the skills and the devotion and the fortitude necessary to create value.

We look forward to updating you on that progress (ph).

Thank you very much.

Thank you very much.

This concludes today's conference call.

You may now disconnect.