AstraZeneca PLC (AZN) Q4 2006 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2006 MedImmune Earnings Call. My name is Nicole and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions). I would now like to turn the call over to Mr. Peter Vozzo, Director of Investor Relations. Please proceed.

Good morning and welcome to MedImmune's quarterly conference call with investors. This call is being electronically recorded and is copyrighted by MedImmune. No reproductions, retransmissions or copies of this conference call may be made without the written permission of MedImmune. In this call, members of our senior management will discuss MedImmune's financial results for the full year and fourth quarter of 2006 as well as the Company's business outlook. Please note that any statements about the Company's prospects or future expectations are forward-looking statements. As you know, forward-looking statements involve substantial risks and uncertainties and actual results may differ materially from expectations. Please refer to the press release issued earlier today that is related to this call and to our filings with the SEC for more information on the risks and uncertainties that could cause actual results to differ. Please note that as part of this morning's press release and filing with the SEC, we have included schedules that present the most directly comparable GAAP measures for each historical non-GAAP measure as well as a detailed reconciliation between the two. Also, MedImmune assumes no obligation to update the information in this morning's press release or as presented on this call except as may be required by applicable laws or regulations. Today's press release describing our results for the full year and fourth quarter of 2006 may be found on our website at www.medimmune.com in the box marked "News" or with the archived press releases on the Investor Relations page. And now I will hand the call over to David Mott, MedImmune's President and Chief Executive Officer.David Mott: Good morning everyone and thank you very much Peter. First of all for those of you that can recognize my regular voice I will assure that this scraggly voice is not the result…

Thanks Dave and good morning everyone. I would like to begin discussion of our financial results with revenues. As Dave mentioned, we achieved total revenues in 2006 of $1.3 billion, up 3% from $1.2 billion in 2005. For the 2006 fourth quarter, total revenues increased 7% to $529 million from $492 million in the 2005 fourth quarter. As we expected, worldwide sales of Synagis for 2006 were about flat with 2005 at $1.1 billion. Specifically, U.S. sales were $906 million in 2006 and $905 million in 2005. Internationally, our sales of Synagis to Abbott were approximately $159 million in 2006 and $158 million in 2005. If we look just at the fourth quarter of 2006, worldwide sales of Synagis grew 4% to $457 million from $439 in the 2005 quarter. In the U.S., our reported sales percentages increased 6% from $379 million in 2005 quarter to $403 million in the 2006 quarter. One item of note for the 2006 fourth quarter relates to some work that we recently completed with respect to Medicaid rebates. When we gave you guidance in December, we were about half way through a thorough assessment of the impact of certain legislative changes that were enacted earlier in 2006 requiring Medicaid programs to improve their reporting capabilities for rebates over the course of the year. Based on where we were at the midpoint of our assessment, we thought that the liability recorded over the last few years would be reduced and net sales would be favorably impacted. The final result of our review was that net sales in the 2006 fourth quarter were increased by about $20 million. International sales to Abbott in the 2006 fourth quarter decreased to $54 million from $60 million in the 2005 quarter, primarily due to timing of orders from year-to-year…

Thanks Lota and good morning everyone. I would like to update you all today on our fourth quarter progress on our Synagis business, as well as our performance during this year's flu season, and then finally take you through where we are in preparations for the launch of our new refrigerated formulation for FluMist in 2007. So let's start with Synagis. As we entered into this year's RSV season in the United States, we ramped up our resources in several critical areas, with the goal of increasing our operational effectiveness and efficiency within the sales and marketing organization. Since I walked you through many of these initiatives in our last conference call, I'd now like to update you on the impact it had on our business thus far. First, the timely expansion of our sales organization with a 125 new sales professionals in 2006, has allowed us to increase our coverage of pediatricians' offices this season. We have targeted additional 6000 pediatricians this season, over the 41,000 pediatricians at MEDI and raw sales-forces focused on together in previous seasons. Through this effort, we have expanded the number of offices identifying premature infants and referring those infants for prophylaxis to the distributors in comparison to last season. This increase in reach and overall impact is going to be critical to our success, as we progress further into the second half of this year's RSV season and into next year. We also restructured our approach to specialty pharmacy providers and distributors over the summer. Just to take you back, we expanded our network to better align with our payor partners and we improved our contracting approach to focus on the elements that we believe to be important to this product, including faster triage, providing broader access to product, and enhancing patient compliance.…

Thanks, Peter, and good morning. MedImmune has made substantial progress during the 2006 fourth quarter managing the development of its product pipeline. First, since Peter just finished talking about refrigerated FluMist, let me provide an update on our development plans for the vaccine. Last month, we received FDA approvals to use this formulation in helping to prevent influenza in healthy people 5 to 49 years of age. The next step in our plan is to expand the label to include children one to five years of age who do not have a history of wheezing or asthma. In this population, we have a very good risk benefit profile for FluMist compared to the injectable vaccine. Our supplemental BLA for approval in this population is currently under review by the FDA with a PDUFA date of May 28. As was mentioned before, MedImmune is the first manufacturer to deliver vaccine to the market this season. Initial lots were released in July and the FDA released all of our FluMist lots for distribution by mid September. Our goal is to consistently deliver FluMist to the market early to provide for back-to-school immunizations. Given the results of our Phase III study in children under five, showing that FluMist was 55% more effective than the inactivated shot at preventing influenza caused by all strains, both matched and mismatched, bringing the new FluMist to the market next year is not only important for MedImmune, but its also an important contribution to the public health initiatives in flu prevention. In the mean time, we continue to publish data in the peer-reviewed literature. The results of our school-based vaccination study with FluMist were published in December 2006 in the New England Journal of Medicine. This study involving more than 15,000 school children, found that households with children…

Thanks Ed. Let me just wrap things up with a brief legal update on two items. First, we are very pleased that last month the U.S. Supreme Court ruled in MedImmune's favor in two cases regarding the patent litigation process. The Court's decisions mean that MedImmune is free to pursue its complaints regarding non-infringement, invalidity and unenforceability of two patents, one being the Cabilly II patent and the other being the Morrison patent. We intend to do so vigorously and we continue to believe that our position will prevail. Also last month, the U.S. District Court for the District of Maryland rejected Sun Pharmaceutical Industries Ltd.'s motion to end the patent infringement action regarding Sun's proposed generic amifostine product. In the decision, the Court has specifically denied a motion for summary judgment of non-infringement regarding one of MedImmune's patents covering the file. And at the same time, granted Sun's motion for summary judgment in part on another. With that, I thank you all for your continued support of our business and let's open up the lines to answer your questions. Please, again, as we talk about every quarter, please limit yourselves to one question each out of courtesy to those who in the queue behind you. Thank you very much. Operator?

(Operator Instructions). Your first question comes from the line of Craig Parker from Lehman Brothers. Please proceed.

Good morning. Dave, I'm just trying to understand the assumption of 9% growth next year when you effectively had no unit growth this year and may be you can comment on this year's RSV season, it looks like it was similar to or perhaps a little bit lighter than last season, but what are your underlying assumptions for that 9% growth in terms of unit volume, price and the RSV season?

Sure, thanks Craig. First of all, let's make sure we don't confuse season and years. These are complicated when you're in the cold and flu business like we are. But the 9% number that both Lota and Peter referenced on the call refers to our expectations for season-over-season growth for the 2006-2007 RSV season compared to the 2005-2006 RSV season. And that is anticipated growth rate in our reported product sales for the product on a worldwide basis. In fact, we expect the growth rate in the US and ex-US to be very similar this season. As you all know the shipping patterns to Abbott International vary a little bit, it can be lumpy from year-to-year, but this year they happen to line up pretty well with the US growth rates. So, I think, the two are quite close, and that 9% represents a combination of volume and pricing. So as you think about that -- the US side of the business, we are probably looking at something in the range of 6 percentage impact from price and very modest unit growth in that for this season, and very modest low single-digit unit growth for this season. And then ex-US at the end-user level, we are continuing to see very strong end-user demand growth. I think through the 12 months ended, the most recent period, I have data for, 12-month ended 9/30/2006, we saw about 25% end-user growth in the ex-US market. But again, our shipping patterns of products to Abbott International aren't directly linearly linked to the end-user demand growth. So we are expecting our growth over this year season to be in that 9% range to Abbott International as those bounce around a little bit. So that gives you a sense of the combination of volume and price in US and international altogether, driving about 9% of worldwide product sales growth for MedImmune. And as you might note in there, we've nudged that down about 1 point from 10%, which we had targeted. I guess when we talked at our Analyst Day in December, recognizing Peter's comments on the call about pushback beginning in the season from payors and the impact that that’s had on getting us off to a little slower than expected start, but obviously still pretty close at that 9% level. Hopefully that helps you on that Craig.

It does. I am going to go back to my tradition of asking more than one question to follow-up on that though. It looks like most payors, at least the ones that we've surveyed, had a hard stop of 5 doses, and is that -- where we've been able to get data from states and hospitals and counties, it looks like the RSV season, at least through the end of December, was a bit below last year is that -- do you think it's accurate?

Craig, frankly it's very hard to get complete data on that. We have different windows into it. Our expectation is that much like we saw some constriction at the beginning of this year season, we may well see a modest increase in restriction at the back-end of the season and we've planned for that in the way we build our business model for this year. We don’t see wholesale changes in that. And remember again that -- frankly for the vast majority of kids and in the vast majority of parts of the country, 5 doses is just fine. It represents very good compliance with care and, in fact, exceeds our average number of doses per kid, so that’s doing pretty well. There are some pockets of the country though, and these are the some of the things that we're really trying to work on as we hopefully can refine the way guidelines are interpreted and implemented, but there are pockets of the country where clearly the season starts earlier than November and other pockets where it maybe runs later than March, and in some places where it runs substantially longer than five months. If you go down and you look in Florida, the season is typically in the range of 10 months. If you go all the way down to Southeast Florida, it’s frankly more like 12 months. I have seen data recently in South Texas in the Corpus Christi area, going back 10 years consistent virology data showing the season is typically 5-8 months there and starts up in October. So there are some relatively narrow pockets in the country where patients can benefit from additional access to product beyond five doses, but that really is the exception and not the rule. So hopefully that gives you a sense of how we see that playing out, and I think you are right that there could be some additional modest constriction on dosing at the backend of the season. Okay, now that he has violated our one-question rule, as usual we are off to a typical call, next question please, operator.

Your next question comes from the line of May-Kin Ho from Goldman Sachs. Please proceed.

Hi. My question concerns the filing of Numax that I hear that it’s no longer in the first half of the year?

Yeah, I think -- May-Kin, this Ed. I -- what we are planning on doing currently is we have been spending the last year or so, as you know, looking at the completion of the trial, the analysis and the review of the data, and now we’ve kind of turned to thinking about how we can optimize the BLA submission by providing as much data as possible to the agency. Frankly, CP110 was designed as the pivotal trial and sort of stands as a pivotal trial for the approval. But we do have additional data, both data that’s in the Native American trial and the some data that’s in -- some data in the cardiac study, which we consider to be valuable in allowing the BLA submission to be optimal and so our current plan is to look at the availability of the data in 117, which is the native American trial, that we expect to be available over the summer, and then to anticipate that with those data, supported data to include in the BLA, anticipated submission by the end of the year.

Your next question comes from the line of Mark Schoenebaum from Bear Stearns. Please proceed.

Hi, thanks for taking my question. I only have one question, so it's difficult. There has been a lot of speculation in the marketplace, obviously that MedImmune might become part of a larger company at some point. Can you talk about poison pills, you might have in place. My understanding is that the current poison pill expires in July. Is that something that you can comment on to confirm and if it's true, what are your plans, do you expect to ask the Board to reinstate that? Thanks.

Sure, thanks for the question Mark. MedImmune does intend to become a bigger company, primarily through execution on our business plan overtime. That is our core plan. There is always the alternative of doing that through a business combination as well, which clearly we evaluate as a Board from time-to-time. With respect to the poison pills, you are right there. Very typical poison pill was put in place by [us back] in 1997 and expires sometime during the course of 2007. Those things are typically 10 year pills. What those really do is simply provide, in most cases, a little additional negotiating leverage to a Board in the situation of a change or control and try to maintain a control over the process and there will be ongoing evaluation of what to do as that expires, whether we implement new one, whether we don't implement a new one. Trends have changed some in the industry overtime on that. I think there are a little less universal than they used to be. Pretty much everyone had one, a decade ago. But now, many companies let them expire, some companies renew them and others have other strategies. So, I can't really speak to what we will choose to do when that time comes here.

Okay. Thanks, David.

Your next question comes from the line of Geoff Meacham from J.P. Morgan. Please proceed.

Hi guys. Can you give us a sense for where you are with the percent of payors still requiring prior auths versus last season? Just wanted to get a sense for -- of your progress there?

Yeah, I will take that one. I don’t think we’ve seen an increase in the overall prior auths relative to what we've been able to negotiate with payors on inappropriate prior authorizations. I think season-on-season, we've stayed flat but relative to and I will just back up and say that these are our internal estimates and how we quantify that, is by talking with the payors and getting their input, finding out exactly what the process is for getting kids on to the product. But we continue to work with payors on modifying areas that are inappropriate for prior auths. This is an industry trend on biologics and it's something that we don't expect that we're going to able to totally stop, but we want to make sure that the appropriate kids for products do not have prior authorization in place. So, net year-on-year, I think we've stayed flat, but it's an increasing pressure on the market.

Okay, thanks.

And your next question comes from the line of Steve Harr from Morgan Stanley. Please proceed.

With the Numax filing on the second half of this year, how are you guys thinking about manufacturing for the '08-'09 season? Are you willing to risk, scaling back Synagis with the thought that you would have Numax approved for the 2008 season. Or do we write that off for the '08-'09 season? I assume that you won't be able say that Numax won't be launched until 2009 or 2010?

That’s a great question Steve. I will tell you that our Head of Operations, Ben Machielse keeps circling around our offices asking exact questions. Good news is one of the new processes that we have implemented is a freezing process for both products. It has the potential to give us an awful lot of flexibility in our supply planning. So one of the things that we are doing is we are freezing away bulk inventories of Numax, so we can make it whenever we have an open slot and start to build some inventory and then bring it out and do the finishing later. We have always anticipated a transition period between Synagis and Numax and given the tremendous record we have now over almost a decade of use of Synagis in the marketplace, regardless of the timing of approval of Numax. We don't expect there to be an abrupt switchover, we view it as kind of plus or minus two season switchover. So the question is, how much Numax supply do we need to mix in, in year one and we are still working through our modeling of that. But our expectation is that we will have commercial supply of both products available and we will try to fine-tune the balance of those as we get closer and closer to it. But we do have some forgiveness in the system because of our freezing process. So, since both products are expected to be available in the market side by side for some period of time. We can inventory bulk above and then bleed them in as we need them in the marketplace. Thanks Steve, Ben Machielse, will appreciate the fact that you are sharing his pain.

Your next question comes from the line of Ian Somaiya from Thomas Weisel. Please proceed.

Thank you for taking my question. Dave, you and Peter have outlined with numerous steps to reinvigorate the Synagis franchise this season. I don't if there is scorecard you can provide us in sort of mix seasonal of what's worked, what hasn't worked, what adjustments you need to make going forward?

Let me hit that first and Peter can chime in with any additional comments he wants to make. I'd tell at this point frankly we are very, very pleased with the crispness of execution in our commercial organization. We are in a very different place than we were a year ago. And I think that our expansion was implemented flawlessly. The transition from Ross to MedImmune has been done in an extraordinarily profession fashion and I tip my hat to the Ross team as well as the MedImmune team for that. It was a good partnership all the way through and frankly in many parts of the country it continues to be, because they are friends out there and we continue to collaborate and work together. So, that transition was really about as closed to flawless as you can ever have. Our modifications to our distributor network and our contracting strategy with specialty pharmacy partners has been done very, very well this year and that system and network is working better than it probably ever has in our distribution of Synagis, which isn't to say that we don't have issues in little areas and from time-to-time in that, but we are in a dramatically better position than we have been historically. We have significantly stepped up the capabilities that we are bringing to trainings, sales training and when we deployed our new representatives this year they were ready, much more ready than we've ever put a team in the field in the past. I think that's been outstanding. We brought in a lot of our real veterans, our clinical marketing managers in December for a training program as well. So, I think we are continuing to upgrade the skills and capabilities that we are supporting our sales organization with. We…

I think Dave summed it up in the short and long-term. The only thing that I would add is that partnership between my team directly and Ed Connor's team on the medical clinical side of the house is better than it's ever been here at MedImmune. We know that in the longer term, we are going to have to put data behind changing some of these payor policies and starting to move some of our current position on the guideline front. And we've actually put into place quite a bit of work there, some of which I have summed up, but not all of which we've actually communicated, as we continue to build out our plans there.

Okay, next question?

Your next question comes from the line of Phil Nadeau from Cowen And Company. Please proceed.

Good morning and thanks for taking my question. Dave, you’ve mentioned that FluMist sold about 2.5 million doses this season. If I remember correctly, your guidance was 3 million doses. So, to what do you attribute that shortfall? Was it just a light flu season or do you think there was any impact of the [gem on paper]?

Sure. Thanks for the question, Phil. Actually -- hopefully, we are not quite finished yet with this year's flu season and that was really a comparison of the second half of this year to the second half of last year that we made in the earlier part of the call. There will be some continued trickle out, primarily to some of our government customers like the DoD that does immunize on an annual basis and you’ll remember we saw some modest sales in first quarter of last year. So, we are really not finished yet. But we feel like we made really good progress this year. When we look at the number of the pediatric offices that we got the product into, we achieved our objective of getting the breadth that we think we need for the base for the launch for next year. We made some dramatic progress with the ACIP in getting them to expand their recommendations and inclusion of FluMist this past year that we think will bode well for launch next year with refrigerator stable. But at the end of the day, we were still hampered by the frozen formulation of the product, the narrow label. And thus far very modest flu season we've had this year, it's still early frankly, that flu typically peaks in the January-February timeframe, but because we really saw across the country very little flu activity in the first part of the season, it has been quite this year. And I think you probably heard that from some of the other manufacturers as well. I don't think that the paper that you referenced had any impact of any kind.

Great, thank you.

Your next question comes from the line of Eric Ende from Merrill Lynch. Please proceed.

Thanks. I actually have a two-part accounting question, if I could? First of all, you mentioned that you are taking down your '07 amortization expense due to longer Synagis amortization schedule. It sounds like that raises EPS by about $0.75. First of all, is that correct? Second of all, was that on your prior guidance? And then the second part of the question has to do with the $20 million of additional Medicaid rebate. I was just not clear on what you were saying there. You are saying Synagis sales would have been $20 million higher in the fourth quarter if that didn’t happen?

Okay. I’ll take the amortization. Actually, the (inaudible) is actually just to give you the metric on as we go forward, we would anticipate over the remaining amount of Synagis sales during the period that we actively expect to market Synagis. We would on average be recording about $0.07 of amortization, that’s not $0.07 impact to EPS in any one period. It's $0.07 over the -- for each dollar of Synagis sales. So essentially how that works is, the bucket of amortization -- the bucket of intangible assets, it's remaining on our balance sheet, which is roughly about $220 million. It just has to be spread out over the remaining time. Before when we were taking in at the rate of $0.10 on a dollar, we actually anticipated a slightly quicker transition between Numax and Synagis. But because we are likely to keep Synagis on the market a bit longer and actively market specifically for kids with CHD, then the denominator actually is a little bit bigger and therefore the rate of amortization is a little bit lower.

And to translate that, Eric, into EPS, that’s less than a penny, not $0.07, less than a penny year of impact.

And then, the second part of the question the $20 million?

Yes, so -- yes, if we have not had the adjustment for Medicaid rebate, our Synagis sales for the quarter and for the year would have been $20 million lower. I would just point out that we had actually about 3 years ago been watching the legislation and the sort of what was anticipated to happen with respect to Medicaid programs that the Medicaid area was going to become one where states were going to be encouraged to build these recording capabilities. So, we actively began recording what we thought our probable liability was. As it turns out while states were very active in looking as a go forward impact, they have suggested to us that it’s less likely that they’ll go back and mine the data for earlier years. So, therefore we adjusted our liability.

So, it actually benefited you by $20 million.

That's correct.

Okay. Thank you.

And again, as Lota mentioned in her comments, we knew that was coming at the time we all talked about guidance for '06 and beyond on the December 6th Analyst Day. And we were about halfway through our analysis at that point because of the changes in legislation over the course of years, so not really surprised. We didn't know the final number, but we knew that was coming as we built our guidance.

Your next question comes from the line of Jim Reddoch from FBR. Please proceed.

A question on HPV-related revenues, the $14 million, I think was little higher than expected, can you tell us how much of that was a milestone or is non-recurring and how much was royalty? Thanks.

Yes. Actually, it is a little bit confusing about that because the way that the HPV agreement works, at least where we are right now with Merck, is that they are still in the process of paying both milestones and royalties. And some of the milestones are actually sales based. So as they hit a certain level of sales, we get a milestone. So, it is difficult to dissect that and they actually have -- as such we not dissect between royalty and milestone. I will tell you that in 2007 that we only have -- we believe about one milestone less, so it will become much more clear in 2007, as we begin reporting our numbers, how to look at that royalty strength.

When should we expect that milestone in '07?

Well I think that we only have the data that is available publicly as well and we probably will see that sometime in the first half of 2007.

Okay. Thanks.

Well terrific. I see its now about 9o'clock, although I have different times on my Blackberry and my watch, but I wanted to thank you all very much for spending an hour with us this morning, and talking through the quarter and through your continued support of the business. We think we are making excellent progress and are looking forward some substantial growth as we enter this '07-'09 timeframe. Thank you and we will look forward to talking on our next earnings call. Have a good day.

Thank you for your participation in today's conference. This concludes the presentation, you may now disconnect. Good day.