Seagen Inc (SGEN) 2007 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Seattle Genetics second quarter 2007 financial and business update conference call.

(OPERATOR INSTRUCTIONS)

This conference call is being recorded today, Wednesday, July 25, of 2007.

I would now like to turn the conference over to Peggy Pinkston, Associate Director of Corporate Communications. Please go ahead, ma'am.

Thank you, operator. I'd like to welcome all of you to Seattle Genetics second quarter 2007 conference call. With me today are Clay Siegall, President and Chief Executive Officer; Todd Simpson, Chief Financial Officer; Eric Dobmeier, Chief Business Officer; and Tom Reynolds, Chief Medical Officer.

The press release of our financial results is available on our website.

Today's conference call will include forward-looking statements based on current expectations. Such statements are only predictions, and actual results may vary materially from those projected. Please refer to the documents that we file from time to time with the SEC and which are available on our website for information concerning the factors that could affect the Company.

I'll now turn the call over to Clay.

Thank you, Peg. And thank you all for joining us this afternoon.

Seattle Genetics is well positioned to fully exploit her diverse pipeline of antibody therapeutics for cancer. We have four product candidates in clinical development, and in coordination with our collaborators plan to initiate eight new trials across our portfolio over the next nine months, particularly focused on SGN-40, SGN-33 and SGN-35. We also intend to file an IND for a fifth antibody product, SGN-70, in the first half of 2008. We are investing our resources on a strategic development plan for programs with therapeutic promise and the potential to provide the greatest clinical benefit and shareholder return.

During this conference call, I will discuss the progress we are making on our pipeline, creating what we believe is the most substantial corporate momentum and shareholder value to date. Then Todd will go over the financial details for the second quarter and first six months of 2007 and our expectations for the rest of this year.

With SGN-40, we are working closely with our collaborator, Genentech, on a multifaceted development plan that includes advancing SGN-40 into five new clinical trials over the next nine months in non-Hodgkin's lymphoma and multiple myeloma. Our Phase II single agent clinical trial in relapsed diffuse large B-cell lymphoma is ongoing, and we expect to complete enrollment in the first half of 2008. This study was designed to enroll approximately 40 patients and will assess the antitumor activity, tolerability and pharmacokinetic profile of SGN-40 in the most common type of aggressive non-Hodgkin's lymphoma.

In addition, we are planning two clinical trials for patients with relapsed diffuse large B-cell lymphoma to assess the safety and activity of SGN-40 in combination with regimens commonly used in this setting. These trials include a Phase IIb randomized, double-blind, placebo-controlled clinical trial of Rituxan-ICE, or R-ICE, plus or minus SGN-40 in approximately 200 second-line patients and a Phase Ib clinical trial of SGN-40 plus Rituxan Gemzar in patients with relapsed diffuse large B-cell lymphoma who are not eligible for intensive therapy.

We also intend to initiate a Phase Ib study to evaluate safety and preliminary activity of the combination of SGN-40 plus Rituxan in relapsed indolent non-Hodgkin's lymphoma. We have previously reported data demonstrating the synergistic effects of SGN-40 and Rituxan in preclinical models and look forward to exploring the potential of this combination in clinical settings.

In multiple myeloma, we have two Phase Ib trials planned to assess the safety and preliminary activity of SGN-40 in combination with existing therapies. Combining SGN-40 with these therapies may result in meaningful improvement in the treatment of this incurable disease. One of the studies will assess the combination of SGN-40 plus Revlimid and low-dose dexamethasone. The other will examine the combination of SGN-40 plus Velcade.

Our collaboration with Genentech is enabling us to expand both the scope and number of studies we can conduct with SGN-40. We believe these trials will help expedite and facilitate the future development and regulatory pathway for this agent and provide a strong foundation to support the use of SGN-40 as a part of standard regimens for both NHL and multiple myeloma, which remain important and unmet medical needs.

It is important from a financial perspective to keep in mind that Seattle Genetics is reimbursed by Genentech for the costs associated with the SGN-40 program, and we also receive milestones for clinical trial initiations. These financial resources allow us to broaden and leverage our capabilities across the rest of our product pipeline, including SGN-33, SGN-35 and SGN-70.

SGN-33, our monoclonal antibody targeting CD33, is in a Phase I single-agent study in acute myeloid leukemia, or AML, and myelodysplastic syndrome, or MDS. Accrual is complete in the dose escalation portion of this study, and we plan to submit an abstract for presentation at the American Society of Hematology annual meeting in December. Based on the promising data we have observed so far, we are planning to expand accrual into the Phase Ib portion of this study to further define the single-agent response rate of SGN-33.

We are encouraged by our data and are evaluating single-agent Phase II study designs with SGN-33 in AML and MDS in addition to exploring combination regimens. Our first combination study is a Phase I trial of SGN-33 plus Revlimid in intermediate and high-risk MDS patients. This study recently opened for accrual, and patient screening is underway. It is designed to assess the tolerability, pharmacokinetic profile and antitumor activity of increasing doses of SGN-33 when combined with Revlimid.

Research has shown that Revlimid can enhance the activity of monoclonal antibodies by augmenting antibody-dependent cellular cytotoxicity, or ADCC, making this a potentially attractive combination therapy for MDS. The study will be conducted under a clinical research agreement with Celgene, whereby Seattle Genetics will run the clinical trial and Celgene will supply Revlimid to study participants. The companies will share clinical data, but Seattle Genetics retains all rights to SGN-33.

Later this year we plan to initiate a Phase IIb randomized, double-blind, placebo-controlled study of low-dose cytarabine, plus or minus SGN-33, in patients with AML. The study will accrue over 200 newly diagnosed AML patients 60 years of age and older who are ineligible for or decline intensive chemotherapy. There is an unmet need for therapy that can prolong survival, improve quality of life and reduce infections, hospitalizations and blood transfusions in this patient population. We believe that SGN-33 may fill a substantial therapeutic need for older AML patients who are particularly sensitive to the toxic effects of chemotherapy.

The next product candidate we are advancing is SGN-35, our proprietary antibody drug conjugate for CD30-positive hematologic malignancy, notably Hodgkin's disease. SGN-35 utilizes the targeting ability of a monoclonal antibody directed to CD30 to deliver its highly potent auristatin drug payload directly to tumor cells. Patient accrual and dose escalation are proceeding very well in the Phase I study, in which we are evaluating the safety, pharmacokinetic profile and antitumor activity of SGN-35.

SGN-35 represents a promising emerging class of empowered antibody-based therapies that we believe has the potential to significantly impact the way cancer and other serious diseases are treated today. We plan to report clinical data from this study at the American Society of Hematology annual meeting in December.

In addition to our internal ADC programs, our ADC collaborators are also making strong progress. During the second quarter, we received two milestone payments from Genentech based on their continued progress in preclinical development with ADCs utilizing our technology. CuraGen, Progenics, MedImmune and Bayer also continue to advance their ADC product candidates.

Finally, we are poised to enter the clinic in 2008 with SGN-70, a humanized antibody targeted to CD70 that we believe has broad therapeutic potential in multiple oncology and autoimmune disease settings. We plan to file an IND for SGN-70 in the first half of 2008, initially focusing our clinical development in CD70-positive hematologic malignancies. We also believe that SGN-70 has promise in autoimmune disease because of its ability to selectively deplete activated but not resting T-cells in preclinical studies.

The rest of 2007 and the first half of 2008 will be a very productive period at Seattle Genetics, marked by steady milestone achievements and progress as follows.

For SGN-40, we and Genentech are initiating five combination trials in non-Hodgkin's lymphoma and multiple myeloma, triggering substantial milestone payments to Seattle Genetics. We are also completing the ongoing Phase II single-agent study in diffuse large B-cell lymphoma.

For SGN-33, we are expanding our Phase Ib single-agent trial, advancing the Revlimid combination study in MDS, which is open for accrual, and initiating a randomized Phase IIb clinical trial of SGN-33 in combination with low-dose cytarabine in patients with AML.

For SGN-35, we are continuing dose escalation in our Phase I clinical trial and planning additional clinical trials.

For SGN-70, we are preparing for an IND in the first half of 2008.

And, lastly, we plan to report substantive clinical findings on SGN-33 and SGN-35 at the American Society of Hematology meeting this December.

Before I turn the call over to Todd, I would also like to formally welcome John McLaughlin and Dan Welch to our Board of Directors. John and Dan joined the board in June and bring extensive operational, business development and commercialization experience to Seattle Genetics.

Now I'll turn the call over to Todd to discuss financial results.

All right. Thanks, Clay, and thanks, everyone, for joining us on the call this afternoon.

Today I'll discuss our 2007 second quarter and year-to-date financial results, which are on track with our expectations for the year. In collaboration with Genentech, our SGN-40 program is building momentum, and I'll also spend a few minutes providing some updated expense and revenue guidance reflecting those expanded efforts.

Our 2007 revenues have nearly doubled over 2006, coming in at $5.6 million in the second quarter and $9.9 million for the year to date. These increases are primarily the result of amounts earned under our SGN-40 collaboration, which was signed earlier this year. 2007 revenues also include four preclinical milestones earned under our ADC collaborations with Genentech and Progenics.

Total operating expenses in the second quarter of 2007 were $18 million, compared to $12.4 million for the second quarter of 2006, and operating expenses for the year to date in 2007 were $32.6 million, compared to $24 million for the same period in 2006. The increases in 2007 operating expenses are planned and reflect additional headcount to support growth in our clinical and development groups as well as manufacturing campaigns for SGN-33 and expanded clinical trial activity for SGN-40, SGN-33 and SGN-35.

Non-cash stock compensation expense for the second quarter of 2007 was $2 million and was $3.4 million for the year to date.

As previously discussed, our operating expenses continue to reflect SGN-40 development costs. These costs are expensed as incurred and fully reimbursed by Genentech on a quarterly basis. While the reimbursements completely fund collaboration expenses, they get amortized into revenue over the six-year development period of the collaboration, and this is also the case for the $60 million upfront payment received in February and future milestone payments received under the collaboration.

The excess of cash received and amounts billed under the collaboration over amounts recognized into revenue is presented as deferred revenue on our balance sheet, which totaled just over $67 million as of June 30, the majority of which relates to the SGN-40 collaboration.

As to our financial expectations, since the collaboration began with Genentech, our joint product development plan for SGN-40 has been broadened in several ways. Most notably, the Phase II R-ICE combination trial in diffuse large B-cell lymphoma has been expanded. We've also increased our investment in clinical trials for SGN-33 based on the data we've observed so far, and as a result we now expect operating expenses for 2007 to be in the range of $60 million to $70 million. Bearing in mind that the SGN-40 reimbursements are gradually amortized into revenue, we also expect revenues to be higher than previously estimated, now in the $19 million to $22 million range for 2007.

Since SGN-40 activities under the collaboration are fully reimbursed by Genentech, our cash burn guidance remains unchanged for the year. We continue to expect to be cash flow positive for the year, with cash provided from operating activity in the $35 million to $45 million range. We ended the second quarter with just over $132 million in cash and investments and expect to end 2007 with more than $120 million in cash and investments. This keeps us in a strong position to advance all of our programs.

And lastly I want to briefly comment on a recent change in our common shares outstanding. Earlier this month we exercised our option to convert all of the outstanding shares of our preferred stock into common stock. In total, 9.3 million shares of common stock were issued on the conversion, bringing our common shares outstanding to approximately 66.5 million shares. Since this occurred in early July, the shares won't be reflected in our financial statements until the third quarter.

While the conversion did not impact the overall number of shares outstanding, it did simplify our capital structure in that now we only have common shares outstanding. Our ability to convert the preferred stock into common stock was enabled by the increase in our stock price this year.

So with that I'll stop and I'll turn the call back over to Clay.

Thanks, Todd.

Antibodies are changing the way cancer is treated, whether used alone or in combination to enhance the activity of other drugs such as chemotherapy or targeted therapeutics. Seattle Genetics is in a strong position to develop antibody-based therapies for cancer patients whose medical needs are unmet by current treatments.

Operator, at this point we'd like to open the call for questions.

Thank you.

[OPERATOR INSTRUCTIONS]

Our first question comes from Mark Monane, with Needham and Company. Please go ahead.

Greetings from New York City on a beautiful summer day over here.

Hi, Mark.

Hi, Mark.

(Technical difficulty) on all your progress. A couple questions going forward. When you're using SGN-40 in all these different indications, did you choose the indications based on the expression (technical difficulty) on these tumor types, or potential synergy with the other agents that are used in combination? How did you decide on these tumors?

Well, Mark, this is Clay. I'll start and then I'll turn it over to Tom Reynolds, our Chief Medical Officer. But keep in mind that in our earliest Phase I data we reported efficacy in non-Hodgkin's lymphoma, so certainly that was going to be a disease we were going to be following up and looking at in deeper studies. With multiple myeloma, the expression is very good if there's big market opportunity for us where there's really no antibody in development. So that really contributed to our decision process on that. And, Tom, perhaps there's something else you'd like to add to that for those two indications.

This is Tom, Clay, thanks. In multiple myeloma, I think it's important to recognize that Revlimid has been shown in many studies now to enhance the factor function of antibodies in cancer chemotherapy. And so we think that's a particularly good choice for multiple myeloma as well as in other indications such as for SGN-33. So that's one combination we think that will have particular synergy.

We're also starting to develop some other interesting preclinical data that might suggest that SGN-40 would have additional activity in (inaudible) chemo for some of the other regimens. So we'll wait to see clinical data to confirm that.

In terms of choosing these different indications, do you have an a priori number with Genentech on what you want to see in order to decide whether to make a go or no-go decision? How is that done, and how will that be communicated to us?

Well, Mark, we have a joint development committee with Genentech. And really data guides all. I don't think there is an a priori data set that has to be done. I think you evaluate the data. Genentech is very deep in understanding data sets and hematologic malignancies. We think they're the best company that is doing this, period, bar none. And we think that the data will speak loudly and will guide the joint development team in making decisions going forward.

The last question is we haven't seen antibodies used traditionally in the management of multiple myeloma. I think that could be -- but here at Seattle Genetics there -- not only one but there could be potentially two different antibodies used in this indication. Can you talk about why you think it hasn't been used in this indication and then talk about which strategy -- who will be the ultimate winner, the 40 or 33? How will we know?

Just to clarify, we do have two antibodies that are potentially interested in multiple myeloma, this SGN-40 and SGN-70. SGN-33 is for AML and for MDS, not for multiple myeloma. And perhaps you meant to say SGN-70 instead of SGN-33. And I know we have all these numbers that could get confusing. So with SGN-40 -- or your generic question is why have antibodies not been used for myeloma?

And I think that, first of all, Rituxan targets CD20, and CD20 is not expressed to any appreciable amount in myeloma. So it's not used not because people don't want to use Rituxan there. It just -- it wouldn't work there because there's no target there. And I think myeloma has been a disease that long that physicians have wanted an antibody product, something that's not very toxic, something that's very targeted that they could give to these patients, who are often very sick. And I think that CD40 and CD70, at a later time point, when we put that into clinic starting the first half of '08, are antibodies that could possibly be used in this disease setting.

Perhaps, Tom, you'd like to add anything to that about myeloma and the way it's been treated.

Yes, Clay, I think as we've had these new generation of molecules, particularly Revlimid and Velcade, that have come to the forefront, we've seen some impressive strides in treating myeloma, but we're not curing the disease. And I think this is where leveraging the (inaudible) that we've seen in other cancer chemotherapies, where adding multiple agents that have different toxin efficacy mechanisms you can often get results that are far superior to any one agent alone. We think both of these agents have the potential to be positive, and we're going to continue to drive forward quickly with both of them and really give them a really strong play in myeloma, both the single agent and in combination with other approved therapeutics.

I'll study my numbers for the next call. In the meantime, congratulations again.

Thank you.

And your next question comes from Liisa Bayko, with Next Generation Equity Research. Please go ahead.

Well, congratulations. Sounds like the collaboration's going well, off to a good start. Quick question, will there be any data this year for SGN-40, or is that more of a 2008 thing to look forward to?

You are absolutely correct. It's data 2008. When we look at SGN-40, 2007 will be the year we did the deal with Genentech and will be a year that we will be executing on our plan. We have a very strong plan. We'll be announcing multiple clinical trials, like we said. We're planning five additional trials on top of the one that -- the two we have ongoing. We'll be announcing the trials. We'll be receiving substantial milestone payments. And while perhaps you're not visible to how much work we're doing, it is a massive amount of work that we are doing and our partner, Genentech, right now. So pretty exciting internally with the work that's going on, and 2008, to get back to your question, would be when start coming up with data that will be presented.

Okay, great. And then could you just elaborate at all on the ADC collaboration with Genentech? What kinds of targets are you going after, etc.?

You know what? Eric, can you talk a little bit about our collaboration with Genentech and ADC?

Sure, Clay. This is Eric. So we have a collaboration with Genentech where it's a broad collaboration where they have access to multiple targets that they selected, and they're developing those using our payload technology. So it's -- we can't comment on the specific targets that they're using. They've talked recently in several of their presentations, including in a research day they had a few months back, about their commitment to I think they called them armed antibodies. So they have multiple targets they're working with. We did earn two preclinical milestones in this quarter from progress with two of those programs. We can't say much more than that, but we look forward to keeping you posted as things progress through that collaboration.

Okay, thanks a lot.

And your next question comes from Bret Holley, with CIBC World Markets. Please go ahead.

Yes, hi, guys. Clay, maybe I missed this. You said that you were going to initiate five trials in the next nine months, and I think you only mentioned four trials for SGN-40, (X), the ongoing single-agent trial in the last non-Hodgkin's lymphoma. Is there a fifth one that I missed or that you just didn't say?

I think I mentioned it, but what I will do is we will go back to our notes, and, Tom, maybe -- let's see. So one of them is the R-ICE study.

Yes.

One of them is Rituxan Gemzar.

Yes.

One of them is SGN-40 plus Rituxan in indolent NHL.

Oh, okay, so that's the third one, then.

Yes.

So there's three --

And then two multiple myeloma studies.

Okay, okay, I missed the third one. Okay. And then --

We have two NHLs in diffuse large B, one indolent, two myelomas.

Okay, thanks for clarifying that. The question I had is, for the Phase II trial, for the randomized trial, what kind of time frame might be reasonable to expect you could get data from that if you start in the next six months or so?

Yes, so this is Tom. We are on track to initiate the study in the back half of this year, and we're getting very excited about that. This is a study that's going to take some time for us to accrue, and so I think it's fair to say that this is at least a two-year study to get accrued and to be collecting data on. So you will not be hearing anything about this prior to 2009 other than that we're starting it and that it's going well.

And are -- there's no interim analyses planned for that Phase II trial?

There are no efficacy analyses planned. There is an independent data monitoring committee. They will be looking on an ongoing regular basis at safety data.

My final question is do you have any plans in the front-line setting of non-Hodgkin's lymphoma at this point, or are you just looking at relapsed right now?

We're looking at a relapsed and, in the myeloma setting, we would like to extend in the front line, but we would like to have some additional safety data as well as some more guidance on the most appropriate efficacy populations before we move toward front line.

And I think, to add something to that, in NHL, there've certainly been cooperative groups that have come to us and seen our data in diffuse large B and said, hey, you know, it would be an exciting possibility to take R-CHOP front-line therapy, and which was developed 10 years ago now, and there's been really no advance in 10 years, and it's great therapy. It's transformed treatments in NHL. But still, tens of thousands of people die per year. I think it'd be a number of about 20,000 people die per year with NHL. And so it's still a disease that's not curative.

And so to improve upon what these cooperative groups want to do ultimately is improve upon front-line therapy and give better than R-CHOP. And I think SGN-40 is the type of agent that you could combine to that. And I think we and our partner, Genentech, certainly have interest in that. It's not the first thing we're going to do, but certainly we can envision us getting to that in the not-too-distant future.

Okay. Thanks a lot.

And your next question comes from David Miller, with Biotech Stock Research. Please go ahead.

Hi. Thanks for taking my call. Can you talk a little bit about the regulatory pathway that you see for SGN-40? I assume that this Phase IIb trial would be one of those, but talk about where you think it might break across that threshold to an improved drug first.

Right. So the R-ICE study is set up as a screening Phase II. It is going to give us extremely good insight in exactly how to design a Phase III that's going to have a very high certainty of achieving success. So that really is the key to that Phase II study. Based on the data we see, we'll really be able to flush out with Genentech the final regulatory strategy and vet that with FDA before initiating full pivotals.

Could you actually, then, if it's a screening study -- well, could you actually get some idea before that trial is completed about how to do the Phase III, or does the fact that it's -- that -- I'll just stop there with that question.

Could you repeat that one more time? I'm sorry. I didn't understand.

Yes. Is there -- do you have some way built into the trial under the Phase IIb is that you could some of those answers as to what the screening metrics are before that trial runs all the way to completion so you could get kind of a head start on the Phase III and get the drug to market a bit faster?

So it is a blinded, randomized study. We would only be seeing what our overall pooled aggregate data looks like ongoing and really won't have a lot of insight into how efficacious the product is until that trial finishes. We should have additional efficacy data, however, from our other Phase Ib studies that we'll be working with with Genentech, and I think that will help us streamline our thinking.

Okay. And for the SGN-35 data that's going to be at ASH, about how many patients is that going to be?

That will be a Phase I study, and we haven't talked about the number -- exact number of patients. It'll be a substantial number of patients, likely to be over 25 patients or so.

So (inaudible), we're -- it is a dose escalation study. It's a very conventional design of study. It'll be double digits of patients. And we are pulling together our data for the submission, which goes in next month. And so depending on how enrollment goes, we would like to include as many of those patients as possible in the abstract, and then if we have additional late-breaking data we'll try to make sure that some of that is included in the poster as well. I will have to say accrual is going extremely well, and feedback we've had from our investigators are that they are extremely excited about the trial and what they're seeing so far.

In this conference call you highlighted the kind of non-oncology uses for SGN-70. Now that you have had some resources free up because of the Genentech deal, can you give us some idea of when you might be exploring that side of that particular drug's activity?

Sure. Well, we do have an active research group, first of all. We have a number of immunologists at the Company. We explore things on a preclinical level with a fairly deep dive. We've seen some exciting preclinical activity. We have some more research that we are doing with SGN-70 and the whole CD70 targeted field in the autoimmune disease space.

We have specific toxicology studies that are ongoing that could support future studies, future Phase I studies, in the autoimmune disease space. It's a different type of toxicology study from the one that you would do for cancer. It's a much longer, much more in depth, much bigger follow-up type of study that you need to support Phase I trials in autoimmune disease. And we are going about those trials now. So we're positioning ourselves to go forward in autoimmune disease with SGN-70.

And perhaps, Tom, do you want to make any other comments about this from a clinical standpoint?

Yes. We think that the potential for this product in the autoimmune space is actually pretty big, because we know that our preclinical studies have been quite clear that this agent uniquely targets activated T-cells but does not wipe out the T-cell repertoire, nor does it impact cells that are just currently resting. So we think for many of the rheumatologic diseases that have a large T-cell component this may be a very attractive agent, either as a single-use agent or in combination with other therapeutics that target different targets, that target other cell-surface antigens or other cell populations.

So this spans the gamut, potentially, from things like rheumatoid arthritis in SLE. It might be useful in inflammatory bowel disease. It could also be useful in transplant. And there's a whole host of smaller indications. We're really trying to do good solid preclinical work and research to understand what the best targets are and also to complete, as Clay said, toxicology studies that would enable chronic dosing that would be needed in these type of indications.

But what I can say, to follow up one more thing, David, on your question, is that we have been able to, because of our financial strength, add a lot of depth and strength to our clinical team. So we are getting stronger, continue to get stronger, and which will enable us to do future studies not only in the cancer space -- that's -- historically we've done nothing outside of cancer. But we're strengthening the Company to allow us to do some work in autoimmune disease, but only as it relates to the products we currently have.

Right. Would you take on that development program yourselves, or would you be looking to partner out the autoimmune side?

Eric, do you want to take our thoughts on partnering in general in autoimmune disease and cancer?

Sure. I mean, on the capability side, we feel pretty good about our ability to execute on early clinical trials in an autoimmune disease indication, and Tom could give you more color on that. From a partnering point of view, when we go through our portfolio planning process on an ongoing basis, partnering is certainly something we factor in. We do have a lot going on, and we have a rich pipeline. There's been quite a bit of interest in our programs, especially after the 40 deal.

The good news, we're not pressed to partner anything, and from a financial point of view we're in a strong negotiating position if we do get into partnering discussions. But it really comes down to where do we want to place our bets? Where are the accesses that we want to continue to advance ourselves versus what kind of strategic partnerships would make sense? So for us to do a deal, it's going to need to make sense financially but also strategically in getting the program advanced towards the finish line.

Tom, do you want to comment on autoimmune trial execution here?

Yes, I think, Eric, the early-phase autoimmune studies are something that we believe that we can handle in the near term. And I think depending on exactly which indication it is and the robustness of our molecule both in terms of its safety and in terms of what the efficacy profile is looking like, that's really going to drive whether we believe we can carry the ball on this one on our own over the goal line or whether we'll be doing this in conjunction with something else. But I think we're well positioned to take this in, at least to early phase studies.

Okay, great. I appreciate.

Thanks, David.

And your next question comes from Dhesh Govender, with Monness, Crespi, Hardt & Co. Please go ahead.

Yes. If I hear you correctly, then, Clay, on SGN-40 and the strategy for some potential pivotal trial or registration, then you want to go for second line with R-ICE and then go from there and then look at the possibilities to combo with R-CHOP and move it up to front line? Am I hearing you correctly on that?

Well, what you've heard is that we're making a substantial investment with our partner, Genentech, which they're funding, but we're putting a lot of effort into opening up a second-line study of SGN-40 and R-ICE, versus R-ICE. And --

But you talked about R-ICE before the Genentech collaboration (inaudible).

Right, and we're still on -- that is the same exact trial that we had discussed prior to our collaboration. It's just we're doing it in an expanded way, and we're doing it -- it's robust. And we're -- we've also got some guidance from Genentech. They're incredibly well positioned in this space to help guide studies like this. And I think that one of the very important reasons that we selected Genentech to partner SGN-40 was because of their depth and understanding of this area. So I think that the study that we would've done with R-ICE would've been a very good study. The study that we are now embarking on in collaboration with Genentech is an excellent study, so it's an improved --

Right, so but Rituxan's approved for low-grade indolent, right? So, and then if you look at the history of Rituxan, it actually got approved in refractory setting and then moved up to front line. I'm just wondering if Genentech's taking the same type of strategy regulatory-wise, and maybe it's a regulatory issue --

Well, I think that --

-- (inaudible) NHL.

I think that for NHL it's a little cumbersome. I think that you could take that -- because of Rituxan -- but I think you could take that strategy in multiple myeloma, for instance, or other diseases, where you could have the first time in antibodies approved in combination, like Rituxan was approved for second line, and then bring that toward front line. And that could happen quicker than it can in NHL.

In NHL, going into front line in combination with CHOP is a long study, which would likely be done by cooperative groups and/or by a company like a Genentech, and now that we're partnered with them they are positioned to do that. That's a much bigger study with a lot of patients, because you need a very statistical analysis that would be -- since the response rate of CHOP, R-CHOP, is fairly high, you'd need to have a substantial number of patients to go to front line.

It is certainly doable. It is just something that you'd want to get into commercial sales on a second-line, third-line access in NHL and in MM, and move those faster. And not that you have to wait until you're selling it commercially to start any front-line study, but you want to see some very effective -- or you want to see clinical data before making some of those decisions.

Right. And then a question for Tom, then. What, in terms of your understanding of the pathophysiology of rheumatoid arthritis and Rituxan's use there, what is the utility of SGN-40 possibly in autoimmune and immunology, specifically RA? I notice that Genentech (inaudible) Rituxan grew 11% sequentially, and they attributed that to expansion use in RA. So can you talk a little bit about that?

Yes, I can talk a little bit about that. So many autoimmune diseases are very heterogeneous, and many of them have both B and T-cell components, and we've seen that with a lot of these diseases. Agents like Rituxan, which really are targeting B-cells, might actually make very good pairs to an agent that specifically targets activated T-cells. And I think we really are not at a point where we completely understand the pathophysiology of each of these diseases. It's pretty clear, for example, with RA that you have people that can respond to (inaudible) therapy, and then there's a whole other class of people that do not. We don't understand if the cellular mechanisms are different, and we think our nonclinical models will help guide us into where the most relevant targets are in autoimmune disease.

So has there been discussion, then, with Genentech, on autoimmune disease and SGN-40?

Absolutely we've talked about autoimmune disease. It is not the first disease we're going after. You can bet that as this goes forward, as we get further and further into our cancer trials, there will be continuing discussions of autoimmune disease. But keep in mind with Rituxan, that's not the first place they went. They did cancer and made sure this was a product -- I think that the same tack is what we're taking with SGN-40, focusing on cancer and keeping -- and certainly, during all the time we talked and we spoke with Genentech, and when we showed all our data, before we even did the deal, we talked a lot about autoimmune disease as a possible upside for the future, and I believe that's the way we look at it with SGN-40.

And then a question for Todd, then. Todd, can you help us a little with the cash flow positive? How do we get there given $70 million in cash burn and amortizing the $60 million upfront and the milestones over six years or so?

Yes, so let me start with the burn piece first. The guidance for this year is $35 million to $45 million cash flow positive, positive because of the $60 million upfront payment that's already been received from Genentech in February, but also because of the expected milestones to come in throughout the year, and then, importantly, the reimbursement payments that completely fund and make essentially the SGN-40 program cash-neutral to us. So it's really -- it's the combination of the reimbursements, the milestone payments and the upfront that more than completely offset all of the rest of the burn of the Company this year.

So if you've got five trials starting, one in Phase II, I mean obviously I'm going to assume that the Phase II is going to trigger a higher milestone payment, but then will we get a sense of what those milestone payments are when those trials are started?

Yes, I think -- while we haven't given any specifics yet, I think as we begin to initiate these studies we'll certainly be in a position to talk about what the level of milestone payment is on a per-trial basis, and what we can tell you now is there's a minimum of $20 million in milestone payments committed over the initial two years of the collaboration, so between now and the end of next year. They are, as Clay has mentioned and we've all mentioned before, significant milestones and will be very meaningful to us from our cash flow standpoint.

And then you mentioned manufacturing for lintuzumab increased. Who manufactures that for you guys?

Yes, we're working with a CMO called Laureate Pharma, on the East Coast.

(Inaudible) 33?

Yes.

Oh, sorry. Yes, go ahead.

So they basically, for scale-up, have increased pricing (or something like that)?

Say that again.

They've increased pricing? I mean, you said there's increased cost of manufacturing (inaudible).

Because it was this year that we started SGN-33 manufacturing. When we did the deal several years ago with PDL, we were fortunate enough to get some supply of product from PDL. We're now just about through that product and have been manufacturing new product with our whole new cell line through Laureate this year to support expanded clinical studies after the ones that are currently underway.

Yes, Todd didn't say we had increased manufacturing. I mean, he said we had increased manufacturing expenses just because they were going up because we were manufacturing. They're not necessarily increased over what we thought they would be. We thought we would be manufacturing, but our expenses have gone up, because our expenses in general have increased due to manufacturing, not we have increased manufacturing expenses. So your asking the question why do we have increased manufacturing expenses is not exactly the right thing. It's we have increased expenses. One of the reasons is manufacturing.

Manufacturing campaigns. Right.

Great. I'll get back in queue and I'll follow up later. Thank you.

Yes.

I appreciate it. Thanks.

And your next question comes from Jason Kantor, with RBC Capital Markets. Please go ahead.

Hi, there. Your -- are all of those clinical trials that you're initiating with Genentech, is there a milestone associated with each of those? And are all of those -- if so, are all those included in your guidance?

You know, we are not -- we have not been specific about the exact milestone payments and what they're associated with. I think that the best guidance is looking at what Todd just said, which was the $20 million minimum that is committed by Genentech in the study for the first two years, and so -- and that takes us through the end of 2008. And so I think that the guidance would be to look toward that.

I'm going to ask the question in a different way. If you accomplish all of those things that you set out to accomplish, I assume you will receive some milestones. Are the milestones that you would get for those events included in your guidance?

Yes.

Okay. Are there any other milestones from other collaborators contemplated in that guidance, or would those be extra?

I mean, there are some limited milestones included in our guidance for some of the other ADC collaborations. For example, we've received four so far this year, three from Genentech, one from Progenics. But they're much smaller in size than the SGN-40 milestones.

And then let me -- help me understand this accounting one more time. You -- all expenses that you incur you're booking right away, and then you are amortizing those in a straight-line fashion, or in some kind of modified fashion over the next six years?

Yes, good question, so all of the expenses are booked in our operating expenses as incurred. The reimbursement payments, the milestone payments, the upfront payments, all payments received from Genentech under the collaboration get -- essentially think about it as being put into a pot, and they get amortized into revenue over a six-year period on a straight-line basis.

Okay. So you're -- all right. That's -- you're buying future revenue here, I guess.

Yes, and one of the comments I made in my section before is we've got $67 million of deferred revenue on our balance sheet, and that deferred revenue represents cash and billings that have been received that exceed the amount of revenue that's been recorded into our income statement. That gives you a sense for kind of how much there is sitting there to come in in the future.

And what is your appetite to do partnerships around your other programs?

Eric, how about --

Hey, Jason, it's Eric. I touched on it briefly before. It really depends on from a portfolio planning point of view which programs we feel we can advance the best ourselves given our resources and what type of potential partners there may be out there for some of our programs. There's quite a bit of interest, but we're not forced to partner something too early before we run lots of value in it. So I wouldn't rule out that we would partner another program in the future, but it's certainly not something that we're pressed to do.

All right. Thanks.

Thank you. Our next question comes from Will Sargent, with Banc of America Securities. Please go ahead.

Hello. Thank you very much for taking my question. I wanted to see if you could give us any further guidance on the dosing regimens for the new SGN-40 trials, and then also on the relapsed multiple myeloma trials, are these four patients -- are these envisioned as being add-ons to the current treatment, or is there more of a vision that there would be a switch (from another) first line or previous line of treatment to the treatments you describe in the (inaudible) trials?

Let me start and I'll turn it over to Tom. As far as the way we do the treatment, other than that we've used this drug on a weekly basis, we're not specific with any of this -- of the things that are going on in each specific trial, especially trials we haven't even initiated yet. And once we've initiated it and we start presenting on trials, we provide details. But before you initiate it, for a variety of reasons, it's best not to discuss all of the specifics exactly of how you're doing the treatment. The MM question, maybe, Tom you want to address.

Yes, this is Tom. I just want to amplify one thing Clay said. What we're doing is sticking with the basic treatment paradigm that we've done in our current studies. But what we're trying to do is finesse that a little bit to make it synch up well with the chemo regimens that the patients are getting so that they are easily able to participate and not having to do a whole lot of extra visits just to receive one drug or another. So we're trying to tailor it a little bit. But the basic regimens are quite similar.

And then your question about myeloma, in our initial studies we are -- it's a straight combo with the existing regimens in multiple myeloma that's relapsed and/or refractory. At some point it might be appropriate, should we be able to demonstrate significant activity in those regimens, to move it forward in a more head-to-head setting, but that -- now is not the time for that, and it's really to maximize the use of the combination therapy and assess that in these two Phase I studies.

Okay, great. Thanks. And then if you could maybe provide a little bit more understanding for the ADC program at Genentech, is the feeling that they are looking at your ADC technology versus other technologies for the same target, or that there are two very separate target universes that they are independently exploring with different ADC technologies?

This is Eric. It's really a question of Genentech more than for us. They obviously have a deal with Immugen as well as us, and we feel they're making great progress with our technology. We don't have much insight into what they're doing with Immugen's technology. So all I can really comment on is it's a strong collaboration that's progressing well on our technology, but in terms of their internal strategy and other targets you'd have to ask them.

And we just (inaudible) just stated in this conference call that we received in the second quarter two milestone payments based on activities in our ADC collaboration with Genentech. We did not issue any press release on that, so this is the first time we are stating that. So they are definitely making progress with our technology, as evidenced by those milestone payments.

And do you have any indication as to when they'd be moving closer to an IND based on your technology?

You know, we do have indications of that based on our internal work with them, but that's not public information. That's something you need to ask Genentech.

Okay. Thank you very much for taking my questions.

And your next question comes from Douglas Chow, with Caris & Company. Please go ahead.

Hi. Thanks. For the SGN-40 R-ICE study, how many patients will be in that trial?

So that's going to have roughly 200-plus patients in the study, and with an equal randomization, R-ICE plus and R-ICE minus SGN-40.

Okay. And how many sites will you be enrolling from?

There'll be more than 50 sites. It's an international study.

International? Oh, I see. Okay. And when was the last time you actually got a milestone payment on the preclinical side for the ADC technology from Genentech, (inaudible) your most recent announcement?

The first quarter.

Okay. And -- sorry?

One in the first quarter, two in the second quarter. We also had some last year that we reported.

Oh, I see. Okay. And just wondering regarding SGN-40 and CLL, any more color on the reason why you're not pursuing it there?

Well, I wouldn't say we're not pursuing it in CLL. I would say that we've chosen to pursue NHL and multiple myeloma aggressively, and in speaking with our partner and our joint development committee, it was thought that we should have at least some level of focus on the two disease types we think we can attack first. And I think that there's a very decent chance that we will continue doing substantive work in CLL in the future. It's just it's not on the immediate list of the five studies we're going to start in the next nine months. So I wouldn't rule it as a not. I'd just rule it as a future.

Oh, I see. And then I guess just one last question, I mean, you do have quite a few programs that do sound fairly promising, with SGN-30, SGN-33, 35, 70 and 75. Could you give us a sense from management's point of view, which is really most exciting now besides SGN-40 for you?

Well, all our programs are very interesting. I would say that it's really hard to tell which of your children is the most exciting. So I would say that taking SGN-40 off the table, which is what you basically asked, SGN-33 is something that we're very much looking forward to ASH and presenting our encouraging clinical data. We're initiating two combination studies during the rest of 2007, one of them a very big Phase IIb study in 220 or so patients, another one in combination with Revlimid. So if you look at it from a how much money we are spending, not counting SGN-40, and actually we're not spending any on that, we're bringing in money on that, SGN-33 is taking more of our spend than any other program. And we think that there are some pretty darn good near-term data and events we have in that program.

Great. Thank you very much.

Thank you. And our last question is a follow-up from Jason Kantor. Please go ahead.

Oh, great for getting me in for one last question, a great follow-up to the question that was just asked. Because you've referred to the SGN-33 data with some enthusiasm, and just so that we're clear on expectations, I mean, should we expect to see objective responses, PRs, at least in that Phase I study? Is that what you mean by good efficacy data?

Jason, one of the most important things about clinical trials like SGN-33 is to make sure that we allow our principal investigators to make presentations at appropriate conferences and talk about data amongst their peers. Yes, there are also analysts at those meetings, usually. But it is very important for us to allow our clinical investigators to step to the forefront and talk about the data that they have seen in their clinics collectively going forward. And that's the appropriate time for us to talk about the specifics of it.

What we're saying here is that we are encouraged by our data. We're looking forward to presenting at ASH. And we're initiating three separate things, actually -- two new Phase -- two new studies, a Phase IIb, a Phase I with Revlimid, and we're saying that we're expanding the Phase Ib portion. We announced today that we've completed accrual of Phase Ia dose escalation. And we're just expanding the Phase Ib to try to measure an accurate response rate is what -- something like that is what we said in our call. And so -- and the exact words we're looking now, but to measure that. And I think that that's about as much information as we could give you at this point.

Okay.

What we'd like to be able to really do out of this Phase Ib portion of the study is really to define the single-agent response rate. We'd like to have a very accurate understanding of that. Because that will very much guide how we get this product registered and to the market.

It's just, I mean, I asked the question because I see a lot of oncology companies, and they'll have long-term (stable) disease (and they'll say) that that's very encouraging, considering the patient population they're in, and I just wanted -- I just want to make sure that the expectations of your enthusiasm are set properly. But thanks for your answer.

Is that all you have, Jason? We good?

I'm done.

Okay.

Thanks, Jason.

Thank you.

Thank you. I'll turn it back to you.

Okay, thank you, operator, and that concludes our call. I'd like to thank everybody for joining us this afternoon.

Ladies and gentlemen, at this time you may disconnect.