Analyst Conference Summary


conference date: October 14, 2008 @ 1:45 PM Pacific Time
for quarter ending: September 30, 2008 (3rd quarter 2008)

Forward-looking statements

Overview: Solid growth in revenues and earnings. However, revenues are growing faster than earnings.

Basic data [GAAP] :

Revenues were $3.412 billion, up 5% sequentially from $3.24 billion and up 17% from $2.908 billion year-earlier.

Net income was $731 million, down 7% sequentially from $782 million and up 7% from $685 million year-earlier.

Earnings per share (EPS) were $0.68, down 7% sequentially from $0.73 up 6% from $0.64 year-earlier.


Full 2008 non-GAAP EPS of $3.40 to $3.45 per share, which brings the upper end down from $3.50, due to employee retention expense.

Conference Highlights:

U.S. product sales were $2.45 billion, up 14% from year-earlier. Royalty revenue was $687 million. Contract revenue was $91 million.

Believes financial position is strong, so is well positioned to get through any economic downturn.

Non-GAAP numbers: operating revenue $3.408 billion up 17%, net income $863 million, up 11% from year-earlier, and EPS $0.81, up 11% from year-earlier. These exclude (compared to GAAP) EPS of $0.07 for stock-based compensation and $0.06 for Tanox acquisition and special items.

Phase III Tarceva + Avastin trial for 2nd line non-small cell lung cancer did not meet its endpoints. Tarceva will undergo further combination therapy trials. Numerous other advancements in the pipeline were made in the quarter. There was a single death of a Raptiva patient from PML, which is under study.

Roche proposal for acquisition was rejected as undervaluing the company, but DNA is open to proposals that value the company appropriately.

Product sales:

 Sales (millions of $) Q2 2008 Q3 2008 % change q/q

Cost of sales was $409 million, R&D expense was $777 million, marketing, general and administrative expense was $611 million, collaboration expenses $315 million, amortization $43 million, and litigation $43 million. Total expenses were $2.195 billion, leaving operating income of $1.217 billion. Other expense was $58 million, tax provision $428 million.

Avastin sales increase was largely for metastatic breast cancer. Herceptin benefited from an increased inventory of $12 million, which could be reversed in Q4. Tarceva down due to product returns. Rituxan space is more defensible due to good trial results. Xolair growth trend due to better education on standard of care. Lucentis growth is mainly due to dosing frequency.

Cost of sales was $23 million higher than expected due to delays at a new plant.

Contract revenue expected to be flat in 2009 versus 2008. R&D expense for full 2008 expected around 19.5% of revenues. Retention program expenses will continue through 2010. Other expense was due to losses in preferred financial stocks and auction-priced securities. Cash is being moved to more conservative investments.

42% non-GAAP operating margin.

Cash from operations Was $1.3 billion. $200 million was used for capital expenditures, so $1.1 billion in free cash flow. 5.5 million shares repurchased. Roche owns 55.8% of company. $6.8 billion cash and equivalents.


Net sales to collaborators direction? This line item does not track with collaborator demand. It tracks the release of our lots. Quarterly fluctuations don't mean much. But guiding to strong Q4.

Atlas Avastin/Tarceva 2nd line lung cancer trial? We are more confident based on the data, so pfs (progression free survival) maybe would have been a better endpoint to try for.

Percentage of patients who might not be able to afford their copays in a bad economy? People with a percentage copay could have trouble, it is not a big percentage, but it is not trivial either. We try to step in and help patients when reasonable. So far we have not seen any impact, but we could see more in the future.

Might distributors lower inventories due to the high cost of capital? We have not seen any change. For most products the inventory is about 15 days, and we have agreements to that effect.

Retention program is really just a change from the stock-option program which affects the profit and loss statements. It is the main thing affecting a change in guidance.

Further cash investment risk? We can't go into the exact underlying assets, but believe our cash is very safe.

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Disclaimer: Our analyst summaries may include both our condensations of statements made by company representatives and our own analysis. They are not covered by any warranty. We cannot guarantee anything said by company representatives is true. We try not to make errors, but it is possible. Before making or terminating an investment you should always verify any factual basis of your decision.

Copyright 2008 William P. Meyers