Novartis AG (NVS) 2005 Q3 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 third-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. (Operator Instructions).

Thank you.

I would now like to turn the call over to Ms. Mardi Dier.

Ms. Dier, you may begin.

Thank you, Michael, and good afternoon and welcome to Chiron's third-quarter 2005 conference call.

I'm Mardi Dier from Investor Relations.

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

And joining us for the Q&A today are Rino Rappuoli, Chiron's Chief Scientific Officer;

Craig Wheeler, president of Chiron BioPharmaceuticals;

Gene Walther, President of Chiron Blood Testing;

Dan Soland, President of Chiron Vaccines; and Stephen Dilly, Senior Vice President of BioPharmaceuticals development; and Jack Goldstein, our Chief Operating Officer.

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

These forward-looking statements include statements regarding product initiatives, clinical trials and future manufacturing capacity.

These 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 SEC, including our 2004 10-K, our second-quarter 10-Q and our upcoming 10-Q for the third quarter, as well as our third-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.

Important factors include, among others, the actual outcome of clinical trials and regulatory reviews.

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 an adjusted basis.

A reconciliation of the adjusted numbers discussed today to GAAP is attached to the third-quarter earnings release.

With that, I'll turn the call over to Howard.

Thank you, Mardi.

Good afternoon and welcome.

Today, I'll discuss our drivers for growth, starting with the opportunities ahead of us in Vaccines and then in Blood Testing and BioPharma.

David will then follow in our usual format with a more detailed discussion of the financial results for the quarter.

And afterwards, we will be happy to answer any of your questions.

We have a stellar cast of people here, and we'll be very happy to entertain any questions you have.

The past several weeks have been momentous for Chiron, with multiple milestones achieved which highlight the strengthening prospect of the Company.

And with tremendous resolve, we announced a week ago that we have returned to the U.S. flu vaccines market and are able to renew our service to the public health needs.

Moreover, our technology in vaccines places Chiron well as a potential major contributor to the ongoing efforts to prepare for a possible flu pandemic.

While it has been a strenuous and arduous year to achieve the remediation of Liverpool, we have continued to progress and mature our milestones across our businesses.

And in the coming months, we expect to attain several more achievements, most notably the interim look at the trial for tifacogin in severe community-acquired pneumonia.

So let me start with the discussions on Vaccines.

We saw a notable achievement this week with our flu cell culture vaccine.

I'm very pleased to say that we received the go-ahead from the FDA to initiate clinical testing of the cell culture flu vaccine in the U.S. and begin enrollment, which we did yesterday, in our Phase I/II trial.

We were very pleased to tell you last week about the return of FLUVIRIN to the U.S. market, as this achievement required unprecedented mobilization and involved extensive input and interactions with two major regulatory agencies.

And we fulfilled our pledge to once again to be a participant in a critical public health need and help ensure an adequate vaccine supply for the '05/'06 flu season, and more importantly, beyond.

By the end of this week, we expect to have shipped 5 million doses of FLUVIRIN, 3.4 million of which have been released by the FDA CBER as of yesterday.

We continue to believe that we can provide a meaningful supply of FLUVIRIN for the season, although it will be below the 18 million doses.

Production and lot release are still ongoing, and because we don't have enough experience with all the processes and procedures that we have installed, we do not yet have a tight range of FLUVIRIN doses forecast.

As we said last week, the production season has been truncated by the amount of time that we devoted to the remediation effort in Liverpool than we had previously thought.

And the output was lower due to adaptation to new processes and procedures implemented in the remediation process.

It is the price we paid in order to maximize our confidence that this return to the U.S. supply will be sustainable.

We're in contact with government agencies on regular and frequent intervals to keep them briefed on our supply status with the aim of minimizing any concern arising from lack of a firm updated does projection.

We understand the importance of being able to provide an update on our FLUVIRIN production numbers and accordingly on our 2005 EPS guidance, and we will endeavor to do so for you and everybody else who is interested as quickly as we can.

While returning to the market this year is an unparalleled achievement for Chiron and a clear sign of our belief in the importance and value of the influenza vaccine market, our sights are already on 2006.

With a full season of manufacturing, we project that we will have the capacity for approximately 40 million doses next year, as we expect to have a full production season in 2006 and all of the changes and procedures and processes will have firmly taken hold.

As you know, any production figures depend upon three major factors, which are yield, throughput and the length of the production season.

We have multi-year contracts with all seven of our distributors and already have strong commitments for the majority of this projected capacity for the next season.

At the same time, we see numerous indications that pricing will remain firm beyond this flu season.

Let's review these favorable underlying trends.

The CDC is striving to get 150 million people -- maybe 180 million people -- vaccinated annually by around 2010, and as supply solidifies, we'll be more aggressive in marching towards this goal.

Many cost benefit studies have demonstrated that flu vaccine is one of the most cost-effective interventions, preventing both direct medical costs and productivity losses, and the recognition of these studies has been a factor in the increase in the value of flu vaccine over the last few years.

Increasing recognition exists now that pandemic vaccination could be the -- sorry, the interpandemic vaccination could be the key component of pandemic preparedness in the long run.

And finally, a strong reimbursement policy with the CMS administration fees increase from about $8 to about $18 per vaccination this year will provide additional incentive on the uptick in demand.

FLUVIRIN remains an important driver of our Company, but it is just one part of a larger picture.

Chiron is positioned to be at the nexus of pandemic preparedness.

Chiron initiated clinical testing of a prototype avian flu vaccine after the initial outbreak of H5N1 in Hong Kong in 1997, and our scientists have published avian flu vaccine studies in key journals.

And then, MF59, our proprietary adjuvant used in a product called FLUAD, which is approved in Europe for use in the elderly, could enhance the strength and broaden the response of an avian flu vaccine, therefore reducing the required antigen dose and possibly providing cross-protection against drifted strains of H5N1 avian flu virus.

Our current capacity to produce monovalent H5N1 could contribute significantly to stockpiles for a number of countries.

We're in discussions on this issue with several governments, including our own, and expect to participate in upcoming tenders.

Beyond current stockpiling efforts for pandemics, we are also advancing our flu cell culture vaccine program, which is the next generation for flu vaccine.

Cell culture-based production offers greater manufacturing flexibility and does not depend on eggs.

Chiron has a very strong position in development of a flu cell culture vaccine.

In addition to the initiation of Phase I/II study in the U.S., we have made excellent progress with our Phase III study in Europe of a flu cell culture vaccine, which may be fileable for approval in 2006.

Now let me now turn to Blood Testing.

Blood Testing continues with the successful pursuit of three important growth strategies, which are new assays, automation and geographic expansion.

As you know, our collaborator, Gen-Probe, announced within the past month or so that in reviewing the 510k application for ULTRIO on the TIGRIS system, the FDA has determined that ULTRIO running on TIGRIS was not substantially equivalent to ULTRIO running on the semi-automated eSAS system.

While this is a disappointment, our collaborator, Gen-Probe, is working rapidly to clarify the FDA's questions so as to be able to address them, and we are hopeful that ULTRIO on TIGRIS will be approved in 2006.

Gen-Probe was also informed that it will receive additional questions from the FDA regarding the BLA application for ULTRIO, which is a customary part of the approval process.

We continue to expect ULTRIO approval in the U.S. in the first half of 2006.

Based on the responses from customers in Europe, we believe that the outlook of both ULTRIO and TIGRIS will be bright.

We have already achieved our corporate goals for the year 2005 of 50% conversion to ULTRIO in Europe and the placement of TIGRIS in our key European Union blood centers.

Currently, we have 33 TIGRIS instruments placed worldwide. 13 of those are in the U.S. under the West Nile Virus IND.

We believe that these accomplishments underscore the value of the products and suggests a similar path of success in the U.S. once they are approved.

Now let me turn to BioPharma.

The past month has been a good month for BioPharma.

At the beginning of the month, we announced with our partner Nektar that we had begun the first of two pivotal trials for TIP, or tobramycin inhalation powder, in cystic fibrosis patients.

The trial, called ASPIRE I, will evaluate the efficacy and safety of TIP in the treatment of pseudomonas aeruginosa lung infections.

A second trial is planned for the next year.

The speed and convenience of TIP therapy could be an important advance in treating common lung infections associated with cystic fibrosis.

Two weeks ago, Chiron and its partner XOMA announced the initiation of a Phase I clinical trial for Chiron 12.12 for our anti-CD-40 monoclonal antibody in patients with multiple myeloma.

This is the second Phase I trial for Chiron 12.12.

A trial in patients with chronic lymphocytic leukemia was initiated in April.

And the expansion of the Phase I program underscores our excitement for the compound, as well as the value of our translational-medicine approach of discovery, which has helped us identify disease against which Chiron 12.12 may be effective.

Chiron 258, along with 12.12, represent a renewed, focused and reinvigorated oncology portfolio at Chiron. 258 is a broad-spectrum kinase inhibitor differentiated by targeting a wider set of angiogenic kinases, including VEGF and PDGF and FGF receptors, than the first-generation compounds.

The breadth of kinase inhibition is significant.

It's highlighted in the October journal Cancer Cell.

The article shows the importance of inhibition of the FGF pathway, which mediate so-called tumor escape from pure VEGF antagonists in the animal model.

In addition, we have moved forward with Chiron 265, which we believe to be a very promising compound. 265 is an oral RAF antagonist, and it is on track for IND submission this year.

We believe it is the first potent selective RAF antagonist, and together with Chiron 12.12 and 258, made ours one of the most promising oncology pipelines in the entire industry.

We have another growth opportunity ahead of us in our BioPharma business in the short run, which is CUBICIN, or daptomycin for injection, which we license from Cubist for the European Union for complicated skin and soft-tissue infections.

We're awaiting a positive European and regulatory opinion on CUBICIN and are planning for launch of the product in the European markets early part of next year.

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 futility before the end of this year.

The data will remain blinded to us at Chiron, but we can infer from a positive decision, if that's the decision that is reached, to continue at the interim analysis stage that there is a lessened risk of safety issues and that there is an increased confidence in the statistical power to project efficacy for the entirety of this study, and that is a study we hope to complete patient enrollment by the end of 2006.

As you can see, as we have been mobilizing to achieve the Liverpool remediation over the last 12 months, we have continued to foster the opportunities for growth in the future of Chiron across all of our businesses.

We look forward to updating you on the progress that we continue to make in the weeks and the months to come.

So let me now turn over to David for a detailed discussion on financial results.

Thanks, Howard.

I'll begin with a 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've discussed previously, we present our results on both an as-reported GAAP basis and an adjusted basis.

The adjustments we made this quarter to arrive at adjusted earnings consist of the amortization expense on acquired identifiable intangible assets related to acquisitions and the impairment loss on acquired intangibles related to a yellow fever vaccine.

The adjustments we made in the third quarter of 2004 to arrive at adjusted earnings consist of the amortization expense on acquired identifiable intangible assets related to acquisitions and the purchased in-process research and development related to the acquisitions.

A reconciliation between our GAAP and adjusted results can be found on our website in the Investor section under Financial Reports.

For the third quarter of 2005, of Chiron reported adjusted income from continuing operations of 73 million or $0.38 per share.

Chiron's adjusted earnings as restated were $0.27 in Q3 2004.

Three factors had a material impact on the quarterly comparison of financial results and best explain the significant fluctuations when comparing this year to last year for the third quarter.

As we reported a year ago following the suspension of our license in the Liverpool facility, our entire FLUVIRIN product was reserved for in the third quarter of 2004, resulting in a $91 million charge to the cost of sales line.

Also in the third quarter of 2004, Chiron recognized $46 million of royalty and license fee revenue resulting from a settlement with Roche related to a U.S. patent directed to NAT methods for HIV -- from here I will refer to this as the Roche settlement -- as compared to 8 million recognized in the third quarter of 2005.

Lastly, there were no sales of BEGRIVAC influenza vaccine in the third quarter of 2005, compared to $41 million of sales in the third quarter of 2004.

Total revenues in the third quarter of 2005 decreased 9% to 480 million from 530 million for the same period in 2004.

Product sales decreased 2% to 367 million from 376 million.

The decrease in revenues is primarily a result of no BEGRIVAC sales in the third quarter and the Roche settlement I just described, partially offset by increases in sales and other influenza vaccines and increases in sales of rabies vaccines, PROCLEIX, Menjugate, TOBI and Betaseron.

Royalty and license fee revenues were down due to the Q3 2004 Roche settlement.

Revenues from the joint business arrangement with Ortho, collaborative agreement revenues and other revenues were consistent with prior year.

Gross margins increased to 54% from last year's gross margins of 36%.

As I noted, our entire FLUVIRIN product was written off in the third quarter of 2004.

For the current quarter, the loss of BEGRIVAC had a negative impact on our gross margins.

Research and development expenses for the third quarter of 2005 totaled 107 million, up 4% from the third quarter of 2004.

The increase is primarily related to the development effort in our oncology franchise and our mengiococcal franchise.

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

SG&A expenses for the third quarter of 2005 totaled 117 million, up 5% from the third quarter of 2004.

The increase in SG&A reflects a broad range of activities, significant among them the prelaunch program for CUBICIN, higher employee-related costs and corporate governance.

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

Blood Testing total revenues, including product sales, Chiron's share of the revenues from our joint business arrangement with Ortho, collaborative agreement revenues and royalty and license fees, decreased to 138 million in the third quarter of 2005 from 141 million in the year-ago period, a 2% decrease.

This decrease was primarily due to the Roche settlement in the third quarter of 2004, partially offset by higher product sales of PROCLEIX over a year ago, as well as increased revenues associated with increased profitability from our joint business arrangement with Ortho.

Driving the PROCLEIX growth was the continued penetration into several markets abroad and the introduction of our ULTRIO assay and TIGRIS system outside of the United States and increased donations in the United States.

Royalty and license fees in Q3 2004 reflected the Roche settlement, as well as our settlement with the Blood Transfusion Centers of the German Red Cross, partially offset by an increase in Roche royalties in the third quarter of 2005 due to payment of a higher rate because certain countries entered the EU and because an increase in reported donations.

Turning now to Vaccines, for the third quarter of 2005, total product sales for the Vaccines business were 153 million, versus 173 million in the same period last year.

We saw a decrease in the sales of flu vaccines due to BEGRIVAC, partially offset by increases in the sale of the travel vaccines, the mengiococcal vaccines, and pediatric and other vaccines.

Sales of our flu vaccines were 60 million in the third quarter, down 35% from the year-ago period.

The loss of sales of our BEGRIVAC product drove the decrease and was partially offset by increases in sales of other influenza vaccines during the third quarter.

There were no sales of FLUVIRIN in the current quarter.

Sales of our travel vaccines were 35 million in the third quarter, up 32% from the year-ago period.

Our rabies vaccine drove the increase.

There was increased demand for our rabies vaccines in the U.S., primarily due to a product recall from a competitor, as well as a price increase.

In addition, there was an increase in tender sales for rabies vaccine in Europe.

Our third-quarter mengiococcal vaccine sales were 12 million, up 31% from the year-ago period.

The increase was primarily driven by tender sales to Spain.

Sales of pediatric and other vaccines were 46 million in the third quarter of 2005, up 3% from the year-ago period.

The increase was driven largely by increased sales of our DtP vaccine to GSK, partially offset by a decline in sales of our polio vaccines.

Gross profit for Vaccines increased to 45% from last year's gross margins of 9%.

As I noted, our entire FLUVIRIN product was written off last year in the third quarter.

The loss of the BEGRIVAC sales this quarter had a negative impact on the Vaccines gross margins this quarter.

FLUVIRIN-related remediation costs continue to impact Vaccines gross margins, but are winding down as we near the completion of our comprehensive remediation effort of our Liverpool facility.

This quarter, we incurred approximately 3 million in remediation costs, as compared to none in the third quarter last year.

Moving to our third business, BioPharmaceuticals, total BioPharmaceuticals product revenues were 137 million in the third quarter of 2005, up from 132 million over the year-ago quarter, a 4% increase.

We saw increases in TOBI and Betaseron sales, while Proleukin sales declined.

Our third-quarter TOBI sales were 58 million, up 4% from the year-ago period, primarily due to price increases and increased patient demand in both the United States and Europe, partially offset by wholesaler ordering patterns.

Third-quarter sales of Betaseron were 37 million, up 5% from the year-ago period, primarily due to price increases, increased in-house production and timing of clinical product shipments, partially offset by a reduction in shipments to Berlex and inventory ordering patterns.

Third-quarter sales of Proleukin were 31 million, down 2% from the year-ago period, primarily due to decreased patient demand in the United States and Europe and wholesaler ordering patterns, partially offset by price increases.

Gross margins in the biopharmaceuticals segment increased to 71% from last year's gross margins of 67%.

This increase was primarily a result of favorable product mix and increased utilization of facilities over the prior year.

Let me take a minute to summarize our view of the quarter.

We believe the quarter represents a true turning point for the Company.

We've returned to the U.S. market with FLUVIRIN, clearing the many regulatory hurdles we've faced.

We're proud of this achievement and see this as a critical step to furthering our leadership position in influenza, which includes our work on pandemic preparedness and the advances in our flu cell culture development program.

While we complete manufacturing and strive towards determining the number of doses we can provide this season, our sights are already set on 2006, and we're confident of the role we will play in meeting this important health need.

At the same time, we continue to advance our pipeline and progress on our commercial goals in the BioPharma and Blood Testing groups, highlighting the bright prospects for growth and value creation that we will see ahead for the Company.

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

Thanks, David.

That concludes our prepared remarks, and now I would like to open up to call for questions.

I would like to remind you to please limit yourself to one question per caller.

And with that, we'll take the first question.

(Operator Instructions).

Eric Schmidt, SG Cowen.

A question for David on the royalty line.

I guess first, looking to see if you could quantify the impact to '04 from the German Red Cross, just so we can get a true test of the underlying royalty rate and the changes year over year.

And then second, it appeared through the first three quarters of 2005 that we're running well ahead of the guidance you set earlier this year for minus 10% year-over-year growth in overall royalties.

I'm just wondering if there's anything strange coming in Q4 that would derail us from beating that guidance.

I believe the PRK (ph) was about $8 million -- 7 or $8 million in the third quarter of last year, and versus the Roche fees, which was obviously $46 million in total.

The royalties are running strongly.

We've obviously executed on some licenses this year, which is always a fluctuating pattern.

But from a royalty line perspective, I don't see anything that I would say derail us in the fourth quarter.

But I'm not going to go anywhere in terms of line item guidance while we're still working through the overall guidance for the Company at this point.

Craig Parker, Lehman Brothers.

David, do you have an estimate either in dollar or percentage terms of the impact of price and foreign currency on the sales line?

Very limited impact on FX this particular quarter.

I think there may be a 2% movement in the euro and about the equivalent for the pound, so virtually no effect on both the top line and the bottom line for the quarter.

And how about from price increases?

Well, that's spread across -- we had price increases that took effect for TOBI, Proleukin late in the second quarter, so there was some effect there.

But when you blend it in with the entirety of the business, it's not a significant portion of the numbers.

Geoffrey Porges, Sanford Bernstein.

Rino, since you don't get called on in these situations too often, could you talk a little bit about the pandemic program -- specifically give us a sense of what sort of study you think might be required before you could supply large government contracts.

And then perhaps you would give us some sense of how we should think about your competitive position in bidding on those contracts, and then how they are likely to be priced.

I mean, you could go all over the place from some these being a couple of bucks a dose to being at a significant premium to current flu vaccines.

And I just -- it would be really helpful if you could give us a sense of what the range that's being discussed in the public health circles that you're moving in.

Thanks.

Geoff, I think to answer your first question, you're asking about our competitive situation in pandemic flu preparedness.

And I think you are also asking about the sort of trials that it would require in order to license such a vaccine.

And we have been in active discussions with both the FDA and eight other licensing agencies around the world.

We've put together clinical plans to license the vaccine.

As you are aware, we've started a number of trials, both in the U.S. and we'll be starting other trials in Europe as we go forward.

We think that we know that others are also making pandemic vaccines, but we believe that if we're not in a leadership position, we are in the top three.

Geoff, I do want to say a word about some of the components of your very, very broad question.

This is Howard here.

But just to framework on this question, that there -- there's the part that is the short term, which is the stockpile.

There is the part that has to do with availing our technologies that would then take us to a kind of stockpile vaccine that is going to be efficacious and then has the ability of achieving immunogenicity with relatively few number of doses in a short period of time.

And I think Rino would perhaps be able to say a word about that and the adjuvant's role.

Then there's the third part, which is the cell culture flu vaccine registration program, which was the substance of the announcement we made earlier today.

So maybe with that as a frame or introductory part, Rino can say something about adjuvants and the work that we're doing there?

Talking about the role of the adjuvants and how we are experiencing the development of a vaccine against avian influenza.

We started working for a vaccine against avian influenza back in 1997, the first time the virus H5N1 hit in Hong Kong.

Shortly after we made the vaccine against that virus, we tested in clinical trials.

The data were published in a pioneering study published in the Lancet in 2001, where we described two major findings.

One, very important, was that without an adjuvant, the normal vaccine was not very effective.

However, in the presence of adjuvant, the vaccine was extremely effective and it was also able to induce protection, not only against the strain used for vaccination, but also against strains which had mutated over the years.

Those studies, date back to 2001, are the basis of our experience.

Now, we have started a number of studies to confirm those two main points.

One is the heart of the adjuvant and its potential, second that the adjuvanted vaccine is able to cover strains (indiscernible) over time.

One of the studies is in collaboration with the National Institue of Allergy and Infectious Diseases against another potentially pandemic avian strain named H9N2.

We are testing the results in the next few weeks and those data will be able to confirm what we had found many years ago.

So, the estimate for the scientific point of view is that I believe that we have a potential solution for the avian influenza.

The solution is based on the adjuvant MF59, and the adjuvant MF59 is now (indiscernible), which is just starting the research.

It's a solid basis of a product that we have in Europe, where they're licensed since 1997. and we have a large commercial experience of (indiscernible).

That's great.

Can you just give us a sense of the commercial significance of this opportunity?

Jeff, there are several aspects of this.

In the short run, there is the stockpile, so that's essentially a government tender discussion.

We're having multiple discussions with several governments, including our own, as I mentioned in the prepared remarks.

It is possible, it is possible in the days to come that there will be some kind of announcement.

We understand that there's a great deal of thinking and a tremendous amount of energy on both the Hill side and the administration side.

So it is possible that there will be some policy announcements.

We generally are aware of the policy alternatives considered, which certainly includes the infrastructure part; it includes the monitoring part; it includes the possible financial incentive to establish domestic capacity, encouragement of the technological innovation and stockpile.

So we don't know what will ultimately be in the announcement, but we understand that those are amongst the policy options that have been examined.

But that's the short term in stockpile, and certainly for us, if it turns out that there is a process and there is a financial incentive to establish domestic facility, we would dearly love to participate.

In the long run, as I've said -- as we've said many times, that the solution to the pandemic threat, in addition to advancing technologies and in addition to increasing the interpandemic vaccination rate, we think lies in cell culture flu.

So that's really the significance of the announcement we made earlier.

We have this cell culture flu program, which is possibly targeted at fileability for European registration by -- sometime in 2006.

In the U.S., we started late because we didn't get the rights back until about a year and a half ago.

We went through this process with the FDA to figure out how -- whether or not we can start a city.

It comes out of this cell line called MDCK.

As a result of that, the FDA has requirements that we provide certain toxicology and pathology profile to characterize the risk/benefit relationship of this cell line, that, yes, it's productive, but what might be the risk, since there's no product currently approved in the U.S. that is based on MDCK.

We have overcome those series of questions, so therefore, we are now able to start clinical trial.

Depending on readiness -- depending on what is ultimately the proposal, has several possible points of leverage or impact on the cell culture flu program.

One is that it's possible that the speed of U.S. registration would be sooner.

And the other one, of course, is that there may be public policy imperatives to encourage the purchase from a stockpile standpoint over time of the cell culture flu vaccine because that is the preferable technology.

So it's still fairly new days here.

There's hardly a week goes by without some kind of development in this arena, and we're just thrilled that we are now in a position to be able to participate in just about every aspect of this discussion that is terribly important.

Rachel McMinn, Piper Jaffray.

Just a couple of questions.

One, just what gives you confidence in ULTRIO being approved in the first half of '06?

And along those lines, should we expect or read into West Nile Virus a potential delay there from your early '06 guidance?

And then just a quick question on the line item here.

You had previously mentioned midteens growth for the PROCLEIX line, and that would imply pretty high sequential growth rates.

I'm wondering if you can affirm that?

Sure, Rachel.

This is Gene.

I will take those questions hopefully in order.

I think the first question had to do with the timing and whether or not first half of '06 is still a reasonable expectation.

Based on our information today and based on the guidance that we've given in the past, we're still optimistic that a first half of 2006 approval for ULTRIO is possible.

But until we actually get the questions from the agency, which we -- Gen-Probe is expecting to receive in the next probably seven to 10 days, it's difficult to know with any assurance what the depth of those questions are or how much information they may require in order to be able to answer those.

I think the second question had to do with West Nile.

And as you know, those are two separate BLAs, and so we don't think that there would be any relationship between how the agency is going to review and/or the timing in terms of their approval.

So again, we would anticipate that that is still on track for a first-half 2006 approval.

And that will be on the eSAS platform, as opposed to necessarily on TIGRIS, if the BLA does not include the TIGRIS application specifically, as that's a 510k.

And I think your third point in terms of -- for guidance in terms of where our growth is, I think at this point, as we've discussed, we're not giving specific guidance around year-end.

So I'm not really able to answer that at this point, but overall, we're continuing to hit our milestones.

The corporate milestones that we have identified, we either have accomplished or are certainly on track to accomplish by year-end.

So there's no other color in terms of what, you know, what really derailed ULTRIO?

Is there anything else you can share with us there?

Not at this point.

And again, I think one thing we have to keep in mind is that receiving questions from the agency during a review process is really a normal course of events.

I think we may have been somewhat optimistic in terms of the timing.

But if you look at, for example, the duplex approval, I think it was very normal.

That was a fast track approval, and it still took 14 months.

So I think we anticipate questions.

It's a normal course of event, and as we've said before, our guidance on this has been first half of '06 all along.

So we don't think this is really a red flag, and until we get in kind of the list of questions, which as I said we expect in the next week to 10 days, there's really not any color that we could provide at this point.

May-Kin Ho, Goldman Sachs.

A question about FLUVIRIN.

This morning, Henry Schein indicated that in 2006, they expect that there should be about 10 to 15 million doses of flu vaccine from you, as well as ID Biomedical combined.

This seems to be pretty low versus the numbers that you had in previous years, and I thought that you actually reduced the number of distributors.

So I was wondering what's happening there.

And you also mentioned that SG&A expenses are high due to expenses in corporate governance.

Can you expand on that?

Sure, May-Kin.

Let me take that SG&A first, and then I will turn it over to Dan.

Corporate governance is what relates to really Sarbanes-Oxley.

Sarbanes-Oxley expenses are more this year than they were last year.

And third quarter and the fourth quarter are big periods where we are working through our testing programs that you need to do in order to certify for '04.

So it's more expensive for us this year than it was last year, as it is for many companies.

Do you anticipate that you'll be able to meet those requirements?

We're working very diligently to work through that process.

It's too early to comment on that, though.

And concerning our distributors, we have a great relationship with our distributors, and we have a continuing goal of trying to be less dependent on any one distributor.

But I thought that you have reduced the number.

Not that I'm aware of.

May-Kim, we had seven distributors, and you may be thinking about a week ago, when we were talking about the update of returning initiation of shipment.

We said that at the time on that call, we had quantity commitments that will survive this year into next year with five out of the seven.

Of the remaining two, one of them has subsequently signed, and so that takes it up to six.

And the seventh, there was a contract.

It's just that that contract did not contain a firm quantity commitment.

So that's the math, how we went from five to seven to seven of seven.

So there is no intent on our part to reduce the number of distributors.

It's just that at the time that we answered the question, a week ago, we only had five out of the seven, or six out of the seven, depending on how you look at it.

Now we have seven out of seven.

Quentin Lai, Robert W. Baird.

Could you give a little update with respect to new country adoption of PROCLEIX and ULTRIO, specifically things like South Africa -- is that a Q4 event?

And kind of following up with Rachel and the guidance, will we expect that to see -- hit in Q4?

And then also, could you give an update on the chance that BEGRIVAC will come back to the market next year?

I'll take the first one, Quentin.

In terms of new country adoption and geographic expansion, as I mentioned earlier, we're on target to achieve our four new countries in 2005.

We've already implemented testing in three of the four, and we have another one or two that we are likely to achieve by the end of the fourth quarter.

We have implemented in South Africa, which you mentioned.

They have gone live.

They began testing on October 3 at all three sites.

We have installed eight TIGRISes there, and they are up and running with ULTRIO and things have been proceeding very, very well.

We've had a number of meetings with representatives from the South African Blood Service, SEABB, held in Seattle last week.

And their progress and their experience has been very, very positive.

Additionally, we have implemented testing in Lithuania and have installed in Israel.

So we will be live in those three countries, and as I said, we actually have another one or two countries that will be going live here before the end of the year.

A word about BEGRIVAC.

We've commented on this about a week ago as well.

But let's just review the situation with BEGRIVAC.

The similarity of the situation I think with BEGRIVAC and FLUVIRIN in Liverpool is significantly overshadowed by the differences.

The similarity, of course, is that we had internal quality testing programs that identified some issues with sterility.

The differences are that in the first instance, with BEGRIVAC, we're working through the testing procedures and protocols with the regulatory agency, Paul Erlich Institute, or PEI, and also we were identifying the solutions to our remediation as we were having these ongoing discussions and evaluating our situation with this year's supply disruption, which incidentally, as you know, we were able to address significantly with the German market by increasing the production out of our other facilities and diverting some of the products that were otherwise designated for spot markets.

But the discussion and the relationship that we have with the regulatory agency in the BEGRIVAC situation allowed us to be very, very clear about what it is that we need to do, which is a one-step change or modification in our manufacturing process and a small number of capital investments to enhance the environmental monitoring capability of this facility.

We are very much underway in implementing those activities.

So it's nothing like the 2000-step milestone activities that we went through with Liverpool to restore the manufacturing license and achieve a state of confidence on the sustainability that we went through with the Liverpool remediation.

So we have every bit -- every bit of the expectation that these changes are well underway, and that we're going to be able to return to the German market with these modified process changes and the capital investment on the facility, and therefore we can come back next season.

Alex Hittle, A.G. Edwards.

Thanks for taking my question.

I was wondering if you could give us a sort of update and maybe some numbers around the transition to the in-house manufacturing with Betaseron?

How much did that move from the royalty line up to the revenue line?

And then how do you see that transition flowing going forward from here?

Sure, Alex.

It was about $2 million that moved -- 1.72 million -- something like that.

Relatively small, but it moved this particular quarter.

I'm going to have Craig address the longer-term aspect of it.

Sure.

Thanks, David.

Alex, we're going to move as expeditiously as possible to be able to pick up in-house manufacturing.

However, I should note that that plant is a shared manufacturing facility with our tifacogin manufacturing.

We're actually typefitting that quite carefully and we'll pick up as available depending upon our need for tifacogin and Betaseron.

So I also will remind you that we're really on the bottom line indifferent between which line we take those on, whether we make it ourselves or whether we reflect a royalty on the bottom line.

In other words, the success of tifacogin is really the driver one way or the other as you go forward in the longer term?

That's correct.

They share a facility.

And so when we know the capacity of some quantities we need to pick up, we'll have a better idea of how much we can safely dip into the broader manufacturing space here on.

Great, and if I could just jump in with one housekeeping question, as far as the Roche settlement payments, is the last of those going to fall in the second quarter of next year?

No.

It will be the third quarter of next year.

Joe Slavinsky, Thomas Weisel Partners.

I was wondering if you can remind us where your flu cell culture vaccine stands in relation to the others in development and just your brief thoughts on using canine kidney cells versus human retinal cells, such as is used in, I believe in the C6 (ph) cell line.

I don't think we're in a position to comment on other people's technologies.

The fact is that MBCK production capability, we are experienced in.

We have, therefore, gone as far as we did -- as we have in the European registration effort.

Whatever issue there might be from a tox spa (ph) standpoint, which we acknowledge that the FDA had raised with us, which constituted the burden of proof that we had to overcome in getting the ability to start clinical trial, we have now overcome it, and therefore we're starting to do it.

The facility that we do have in place is in Marburg, Germany, for cell culture flu, and it is the source of the clinical supply.

We believe that that capacity is in place and will be ready for us to supply the market when and if we indeed have a fileable product in 2006.

But the eventual supply for a U.S. market, it is quite likely we will have to explore a U.S. manufacturing site, and it is the subject of intense exploration and discussion I know -- we know is going on in the government's deliberation as to the tenets and aspects of this pandemic readiness policy.

Elise Wang, Citigroup.

Just to get some clarification on where you stand with FLUVIRIN for this season, what do you anticipate as being the remaining amount of time, if you will, for your ability to produce additional vaccine for this season?

Okay, Elise, thank you for that question.

Let me first start by acknowledging that there is frustration, and we are trying our best to minimize that frustration.

In the prepared remarks, we made note of the fact that we're having discussions, regular and frequent, with the government agencies to keep them abreast of our status.

But here's our status.

We want to be able to provide a number, but we want a number to be the right number.

And we're just not quite there yet.

We're working with a new system so that we have to be cautious about our expectations.

And let me just give you a little bit more detail.

As a result of our comprehensive remediation efforts, we are manufacturing doses in what we call a truncated season, or about one-third of a standard production season, and we began late in the actual production because of the delays that we were experiencing as we installed all the changes in structures and processes and equipment, and we -- in the remediation effort.

And indeed, we have encountered challenges associated with the new equipment and system and processes.

And that's why we are where we are today -- that would be -- if we were in a normal season, we would've been today in late October, where a normal production season might have been in July or August in a more typical year.

And secondly, we've really not established a sufficiently clear trend with certain processes and procedures that we have installed, including what exactly is the scrap rate -- that is the products that we make, but we will not end up releasing.

I just want to reiterate the answer that we gave last Monday, and that is that we're not encountering contaminating issues this year.

But we are installing our new processes and procedures, which are necessary as part of the comprehensive remediation effort, with the idea that they need to be sustainable.

It's not just coming back this year and supplying whatever number of doses of vaccines we can supply.

But once we're back, we want to be able to go into normal production season year in, year out.

And because we're late and because of these uncertainties, we are unable to give you a sufficiently narrow range today because if it's too narrow and we turn out the wrong because the trend is not sufficiently clear and we call it today, and it ends up being too narrow, then if we're wrong, then someone is going to say Chiron is shooting itself in the foot at the same place again and again.

I think that's the wit of one of the reports or quotes that we saw in the earlier situation, when we adjusted our dosage guidance.

And if we give too wide a guidance, the low end is bound to be disconcerting, and therefore it's irresponsible from a public health standpoint.

So we believe what we can say today is that we believe we can supply meaningfully for this season.

And we will make that update as long -- as soon as the trend becomes very, very clear, especially with respect to this thing called a scrap rate.

And as we finish the season and spend more time with our workforce, with our supervisory structure, with our management structure, with our policy systems, with the cultural changes we try to induce as an essential part of the remediation effort, then the processes and the procedure will take hold.

And so it's a little bit like breaking in a new Maserati.

The first thousand miles, you are not going to step on the gas too hard.

But we are very confident as we complete this season we will be out of the first thousand miles.

So we have high degree of optimism of returning to a bigger, but more importantly more sustainable supply for FLUVIRIN and for the U.S. market.

So we're grateful -- we're grateful for your patience as we go through these next week or two weeks, and we're very, very hopeful that the situation will clarify so that we can give a firm guidance.

We have time for one more question, please.

Russell Gilbertson, Caris and Company.

Just another question regarding your PROCLEIX franchise.

In terms of your South Korean-tested units, can you give us an idea of how many are there and what we can expect for testing in both South Africa and South Korea next year, and what the potential is also for developing relationships in Japan, China and India?

Hello?

I'm just thinking about how best to answer that, because it's the last question, in a truncated answer for you.

In terms of South Korea, we've started routine testing there in early February, and as you may recall, we received the RFP -- we received 30% of their total volume.

And that represents somewhere around 750 to 800,000 donations in the site that we achieved.

We've also announced, I think at the last meeting -- the last earnings call that the plasma sector has made the decision to implement NAT testing, and we have successfully signed contracts with both of those sites, which will amount to another roughly 300,000 donations annually.

So that's where the volume will be, roughly in 1 million to 1.1 million on an annualized basis.

In terms of South Africa, the three sites do a collective testing of about 1 million donations.

As I mentioned, we just began testing there on October 3, so we'll get a full quarter of that going in this year, and then a full year next year.

In terms of other countries, we foresee the approval in India from regulatory authorities and are in the process now of getting our importation licenses so that we can begin bringing the product into the country.

The testing there I think as we've also reported will be done on demand.

So it will be on a request basis as opposed to a nationalized policy.

So it's difficult to estimate at this point.

It will probably start out low, but we anticipate the volume to grow.

Certainly given the prevalence of disease that we've seen during some of the initial study data, there will be a high need, and we anticipate that that will grow very nicely.

In China, we're still awaiting SFDA approval.

Very difficult, therefore, to predict project when that approval may come and how quickly we'll implement routine testing there.

And I think in Japan, with the other company you mentioned, we are in ongoing discussions with them to do a further evaluation of our ULTRIO TIGRIS offering.

We hope to get that finalized in the very near future.

And once we have something more to report there, we'll be glad to do so.

Can you give us an idea how many units are tested annually in Lithuania and Israel and how those units are being tested currently?

Both are new countries.

The volume in Lithuania is about 80 to 100,000, and in Israel, I believe the number is around 280,000 donations annually.

Okay, well, that concludes our question-and-answer period, and thank you for joining us on the call today.

This concludes today's conference call.

You may now disconnect.