AstraZeneca PLC (AZN) 2002 Q3 法說會逐字稿

Welcome to the AstraZeneca conference call, and to your host, Mr. Ed Sage and Mr. Jon Symonds.

You will remain on listen only until the question and answer begins.

If anybody requires assistance once you are on the call, please hit star zero.

Mr. Sage.

Thank you.

Well, ladies and gentlemen, welcome to the AstraZeneca conference call for our third quarter results.

Leading the call today will be from Sweden our CFO Jon Symonds and on the line are members of the team who will participate in the Q and A. I would like to read the following statement.

The company intends to make use of the safe harbor provisions of the U.S. private securities litigation reform act of 1995.

Speakers on this call may make forward-looking statements with respect to the financial condition, results of operations and business prospects for AstraZeneca.

By their nature, forward-looking statements involve risks and uncertainties.

There are a number of factors that could cause developments to differ from those expressed or implied buy these forward-looking statements.

We refer listeners to today's press release and the latest SEC form F 20 filings for evaluation of these factors.

The company under takes no obligation to update forward-looking statements

Now, over to AstraZeneca CFO Jon Symonds.

Good afternoon, and welcome everyone to the third quarter conference call.

In my introduction I will start with an overview of the nine months results, pick up some of the highlights of the third quarter and then finish with a few words on the Prilosec and increase earnings target for the year.

The second nine months as a whole, sales grown by 9 percent in constant currency an EPS by 10 percent to $1.39.

Operating margins are 25%.

Half a percent lower than the nine months last year.

And below operating profit, and improved tax rate is offset lower net interest.

An aggregate compared to our expectations at the

beginning of the year, we benefited from continuing sales of Prilosec an we haven't incurred the full costs of launching Crestor.

The underlying business, however, is as expected.

Constant currency, grew for the third quarter were 6 percent with operating profits down 9% and earnings per share down seven percent to 39 cents

In drawing out the key factors in the quarter, there are really four things to mention.

Sales mix and wholesaler stocking trends [inaudible] items, currency and the underlying trends in our cost base.

On sales mix, U.S. wholesaler stocking patterns always feature to some extent.

Despite good prescription trends overall, U.S. sales increased by by only 4 percent in the quarter.

In aggregate we estimated that wholesale inventories declined by around $100 million compared to the third quarter last year.

The key products affected were Seroquel particularly, but also top row compels.

And we highlighted the difference between reported sales and the trends for these other products.

In addition to the decline in wholesale industries, we saw declines in Tamoxifen pursuant to the distribution agreement in August.

At this point in time our priority is to maintain an uninterrupted supply of Tamoxifen to the market.

We expect shipments to begin shortly.

With exclusivity ending in February, inventories in the supply chain are likely to remain low.

The shortfall seen in the third quarter is unlikely to be wholly recovered and the drop off in sales following the entry of generics next year is expected to be steep.

It is also worth pointing out in volume terms, Tamoxifen is now declining as Remodex [phonetic] becomes the drug of choice following the results of the recent FDA label change.

[inaudible], two of our highest margin products, this mixed effect is felt on the margins.

As we said in the beginning of the year, other operating income would be lower than last year and would come in bigger chunks.

While the big chunk came in the first quarter with the sale of Pseudla [phonetic], and we have seen the impact of lower royalties on patents that have now expired.

In total other income is $79 million below last year's third quarter and we don't anticipate more to come in the fourth.

While we are dealing with financial income, you will have noticed that net interest income in the quarter was a mere $2 million.

Underlying interest on our cash amounted to $22 million, compared to 28 million last year.

But this was reduced by higher interest allocations on overseas pension schemes, as well as the revaluation of U.S. employee health care liabilities.

Before moving on to the underlying cost trends, let me say a few words on currency.

This quarter we have seen the weakening dollar had a positive effect on sales and a negative effect on costs.

In aggregate, we have estimated that the weaker dollar, particularly against the Euro, added around $150 million to sales in the quarter over the strongest Swedish kroner and sterling added around the same amount to our cost base, resulting in mutual impact on profits overall.

If rates stay where they are for the rest of the year we should see similar trends in Q3 and Q4 and overall would retain our guidance as a whole that currency could be in the region of one to 2% negative.

Let me now turn to cost of margins.

As I mentioned at the outset, margins for the year are half a percent below last year.

Other income reduced margins by .8%. [inaudible] showed an improvement of. 5%, mostly through lower Merck payments, leaving cost movements .2% negative.

The currency represented a big part of this.

The overall, nothing significant to highlight on margin trends.

It's been implicit in our earnings guidance particularly after the strong start to the year

that cost growth in the second half would be stronger than the first half.

This is re-flecked in the third quarter profile, where margins are below last year.

Making R and D and SG and A combined, costs grew around 9 percent over last year in constant exchange rate terms, indicating that currency is adding around $125 million to the cost lines.

R and D costs are growing around 10 percent for year-to-date, particularly in core global trials and in local phase four trials recently launched or about to be launched product.

The R and D costs appear to have jumped significantly but much is due to the comparison with the lowest quarterly spent in '03 last year, clearly the run rate has also picked up.

SG and A has remained steady as a percentage of sales for both the quarter and the year-to-date.

The increase being broadly split between the U.S. and the rest of the world markets.

In the U.S. we have rephrased the Crestor launch costs to reflect the later launch timetable.

For the year we will be around the 10% growth rate for R and D and SG and A combined in constant currency as we indicated at the givening of the year.

However, with the recent strengthening of sterling and the Swedish kroner, we reported growth rates will be higher.

Let me now turn to products.

I won't do therapy by therapy review, but I will pick out the highlights.

First [inaudible] G.I. total sales have grown by 6%.

Sales of next sill more than offsetting the Prilosec.

Net sales to the year-to-date are over $1.3 billion with over a billion dollars of this in the U.S. U.S. monthly market share now stands at 20.7%.

Recently the weekly prescription data has now reached 22% and shows Nexium ahead of Prilosec and now taking more than 50 percent of the new prescriptions for our PPI franchise.

Cardiovascular, I talked about Prodolex [phonetic] sales being out of line with prescriptions but still it has grown by 39%.

We saw Zestril [phonetic] facing generic competition. generic penetration of Zestril [phonetic] has been rapid, ironically U.S. sales in the quarter show 2% growth.

The third quarter last year was very weak due to wholesalers destocking.

This has cushioned the impact of generics on reported sales.

However, I would expect to see a significant decline in reported sales in the fourth quarter.

Oncology there's a lot to talk about.

We already mentioned how low Tamoxifen sales are.

Offsetting this to some extent is a strong performance of Arimidex, where the asset data [phonetic] and label changes are driving sales growth strongly, 73 percent for the year to date and 98 percent in the quarter.

In the U.S., where sales in the quarter were $42 million, they were running stronger than prescriptions, evidencing some wholesaler buying.

Of course, there's IRESSA, which has been launched in Japan and where we are waiting for the FDA's decision for approval in the U.S.

With the positive recommendation for acceleration of approval on 24 December.

With the positive up take of IRESSA on the first weeks in the Japanese markets, sales in the quarter amounted to $26 million with around 5 million or so of this being initial stocking.

Well over 8,000 patients are already taking IRESSA, but we need to see how the market develops before taking a longer term view of forecast in Japan or in the U.S.

There was clearly evidence of pent up demand in Japan ahead of reimbursement.

The label in Japan is also broad, covering inoperable or recurrent non-small cell lung cancer, which is likely to be wider than the initial indications that might be approved in the U.S.

Nonetheless, an excellent start that we are very encouraged by.

Finally, let me now turn to the link topic of Prilosec exclusivity and our earnings per share guidance.

We are pleased that the Court has concluded that our formulation patents are valid and that Andres, Cheminar and Gem far [phonetic] were found to infringe.

We were dispointed that

the Court found that Cutco [phonetic] does not infringe the claims of our formulation patents and we are closely examining the Court's decision.

We believe that AstraZeneca will have a basis for appealing the decision regarding Cutco [phonetic].

The Court has given its verdict, but there is as yet no clear answer as to when generic Omeprazole will come to the US market.

The determination as to when Cutco [phonetic] can begin marketing or how the 180 days exclusivity granted to Andrex and Gemfar applies, involve complex regulatory and patent issues.

We have always said that our decisions would be their in line after the Court and after the generic companies had resolved how to act.

It's difficult for us to speculate when it is a generic companies, not us, who have to make the next move.

What remains is a complex situation that could take some time to resolve.

We have taken the view that generic launch in 2002 is unlikely.

We have increased our 2002 earnings guidance to reflect this.

We will, of course, return to the longer term implications with our year end results in January.

At which time the position may be clearer.

Meanwhile, our priorities are clear.

We continue to strongly promote Nexium as the strongest PPI and this remains the driver of our G.I. franchise over the long haul.

Taking all of the factors I referred to together we now increased our earnings per share guidance to around four to 5 percent above the 173 restated earnings for 2001.

This implies that the fourth quarter will take a similar shape to that of the third.

This concludes my formal remarks.

I will now hands you back to the operator to begin the question and answer session.

Thank you, ladies and gentlemen.

Your question and answer session will now begin.

If you wish to ask a question, key star one on your phone.

If you change your mind and decide to withdraw the question, key star two.

All

questions will be answered in the order received.

Other lines will remain on listen only.

I remind all parties, star one if you wish to ask a question.

We will pause for just a minute.

First question comes from Mr. Andrew Bairn [phonetic].

Please go ahead.

Three questions, if I could.

The first relates to IRESSA.

You gave us the figure for the quarter.

I wonder, could you give us an updated total IRESSA sales number as things currently stand?

Second on IRESSA and the U.S. approval, could you give us an indication of whether the phase four trialing in non-small cell have to be defined before approval is given or whether we can anticipate approval before that actually is decided?

Actually, your share buy back program, are there changes to that following the Prilosec court case?

Finally, I may have missed this, the conference call line went dead, regarding Seroquel, could you make a comment on inventory levels?

If you have answered that we can listen to the replay.

Thank you, Andrew.

Let me take the last one first on Seroquel.

You will have noticed that in the quarter was prescription changes were 49%.

That has been a pretty solid prescription growth rate throughout the whole year.

Our reported sales were only 5%.

So it's a pretty deep reduction in the inventory.

Having said that, if you take the year as a whole, our growth of Seroquel is pretty much around the same level of prescriptions.

It doesn't look like year on year there's the same degree of distortion.

It's always very difficult to predict exactly how much has been consumed in the chain because their calculation - what is very clear is in October we have seen a sharp increase in our sales so far this month.

Which indicates that it was a temporary phenomenon and that we will come back into the fourth quarter with a pretty decent set of sales for Seroquel.

I am going to carry ongoing backwards.

The share buy back program, we pretty well continuously take judgments on the share buy back all the time fending on what information there is in the market appeared what we can anticipate.

We will continue to do that.

I won't make any predictions at this stage as to just how we might act.

Clearly you can foresee that the R and D days are very far away.

On IRESSA, in Japan we have seen pretty good sales in Japan so far this month.

I am not going to give you really more to, don't want to start interim reports of sales, other than to say we saw stronger sings in August and September [inaudible]

On the question of exactly what the mechanics around the approval of IRESSA in the U.S. are, clearly there are ongoing discussions with the FDA.

But as an IRESSA update will feature in the annual update, I prefer to leave the answer to those kinds of questions to that.

I think we can give you a much broader answer when George and others are available to answer at that time.

I am going to push that one on until November 7, if I can, Andrew.

Thanks a lot.

Next question.

Next question comes from Mr. Martin Hall.

From HSBC, martin Hall.

I want to ask you about Nolvodex.

You mentioned that signal stopped buying product from you which is consistent with the statements that have been made in the past.

I'm slightly up certain why the wholesalers haven't beening up your product in anticipation of being unable to supply the bar product.

Or has bar built up so much stock that it can last all the way through to February 2002 without any help from AstraZeneca?

My second question is no mention seems to have been made about any pipeline feeling of Losec, but it appears to have come in approximately 200 million above expectations.

Could you give some explanation behind the Prilosec fill in the United States, what is behind it and how much you think has been pre-bought?

Okay.

Nolvadex, it's unlike other products in the situation I described with Seroquel, it's a two-step wholesaler chain.

Obviously there is the inventory that the wholesalers have.

There's also the inventory that bar carries.

And for most of the period from the expiration of the agreements in August, the wholesalers have been able to draw down from bar because bar did have fairly high levels of inventories.

We believe that they won't last until February, which is why we are seeing orders coming in now.

And we believe that our shipments will occur during the course of this month.

Whether those shipments will occur through bar or whether those shipments will occur direct is still something that has to be resolved.

Quite clearly our commitment to this date is to make sure that the market does continue to have a free supply of Tamoxifen.

But because of the second order effect or the fact that bar has been able to consume its inventories, we are not predicting that we will see a complete bounce back of our Nolvadex Tamoxifen sales in the fourth quarter that will recover the reduced bar inventory during the course of '03.

And therefore inventories will remain relatively low levels as they go towards the final patent expiring in February.

Just to clarify something there.

Are you still prepared to supply bar with product?

My understanding there was that you weren't prepare to supply them with any more drug.

It won't necessarily be on the same terms.

Quite clearly, what is important to us is to make sure that the market continues to get a supply of Tamoxifen.

We haven't closed down the routes of that as to how we will do it.

On the question of pipeline on Prilosec, the sales at the end of the quarter were perhaps a little stronger we were anticipating.

If you look at sales changes through the year versus the

prescription trends, they are pretty close to the same amount.

I think both of them are down by about 22 or 23%.

So we are not seeing anything out of the ordinary on the Prilosec stocking position.

Certainly not against Q3 last year where the amounts involved were pretty small.

If we felt there was a material distortion in Prilosec we would have recorded it in the press statement.

There really isn't anything I think that is extraordinary there.

The best measure for me is the consistency between seeing the prescriptions and the sales to date.

Okay, thanks very much.

Could I have the next question, please?

Next question comes from Mr. James Coverwell [phonetic].

Good afternoon, John.

Two questions on Nexium and Crestor.

On Nexium, could you comment on whether there was any stocking issue and the trend there?

Compared to the second quarter, the [inaudible] wasn't huge.

It seems to have lost momentum and in Europe the same thing.

I'm wondering what is behind that trend.

Is it seasonal or launch phasing?

Secondly, any update of where you stand with increases tore in European approval and when you talked about transferring Crestor launch costs from '02 to '03, does that include European launch costs as well?

Well, there is really not much of an update on Crestor.

There certainly will be on November 7.

So to some extent this answer will be the same as I gave on IRESSA..

We are still on track for filing the data on the first quarter with the FDA as we previously said.

And in Europe we are confident that we will get European regulatory approval this year and move into the mutual recognition process.

I think again a more full description as to where

we are will be given in November.

Summer speaker that's confident of approval this year without needing more data?

Is that it?

I think we are confident of approval this year.

I wouldn't want to qualify any more than that.

Approveable, you mean?

Is that essentially approveable?

Yes, in Europe, yes.

In of the first market, at any rate.

In terms of launch costs, we have certainly undertaken the exercises.

We have done all year, actually, in looking at the point at which we opt male commit costs on Crestor, some of which can occur almost at any time.

Others are dependent on the timing of the launch.

Those that are very dependent on the timing of the launch, we have moved forward to a more appropriate time.

So as you would expect us to be, we are actively managing the way that the company incurs costs associated with Crestor or any launch products for that matter.

In terms of Nexium, there was a bit of an increase stocking.

But that is largely because it is a growing product.

And the wholesalers, even if they are going to maintain the same two-week inventory, with the growing market share that it has and the growing volume of sales, in that two week inventory does increase from quarter to quarter.

Again, I don't think that there is anything that specifically is unusual in the Nexium stocking pattern.

We certainly wouldn't say that we are disappointed by the quarterly sales in next yup.

They may be lower than some of your, some of the analysts' estimates, but I think it is again year on year a pretty good reflection of the underlying trends in that product.

We are seeing the market share moving month-by-month.

Also I think we said at the half year that the market is not static.

It is a market that continues to grow strongly.

The PPI segment is

growing at around 17 percent on a moving annual basis.

But also it is a market where the level of promotion from the other participants in the market doesn't stay static either.

It is quite clearly been facing more competition from the other PPI players as they saw perhaps that the start of generic competition was coming closer.

The dynamics of it are still moving somewhat.

I think we are pretty satisfied with the way that Nexium is moving in the U.S.

In Europe again, it's a little difficult to disaggregate the numbers too much.

There is a seasonal element in that, sure.

The third quarter is always a weaker quarter because of vacations and shut downs and the like.

And also with recent launches in France and Italy, maybe there was a bit of the initial stocking coming away.

But I don't think that there's anything specific changed that we would draw to your attention about what is going on in Europe.

Thank you, John.

The next question comes from Mr. David Beedle [phonetic].

Go ahead.

Good afternoon, John.

Couple of questions.

First one is, I understand some of the sales into Japan for IRESSA were going into International pharmacy.

I wonder if you had any sort of percentage split as to what is actually being used in Japan.

I know [inaudible] on drugs, but I wondered if you knew whether it was a small amount that was going -

Yes, I do.

It is a very small am.

It is probably around only a million.

Thanks.

The second one is, I just wondered whether you have her anything on the generic volume for Nexium in the U.S.

I understand [inaudible] has got a bulk of Metzaprole [phonetic], and they currently have formulations but they have been talking about licensing from [inaudible] if needed.

I wondered if you had any ideas of timing, et cetera, if you heard about any generic companies preparing for

that?

I am not aware of anything on that, David.

I don't believe there have been any new filings.

Certainly none that we have been alerted to.

I believe that they would have to do that if they had.

Thanks, John.

Great.

Thank you.

Next question comes from Mr. Chris Spooner [phonetic].

Please go ahead.

Hi, John, it's Chris.

On Crestor, can you make a few comments on this, given that there is still about 70,000 patients in initiating to the [inaudible] studies starting about now, what would a real increase in R and D in dollar terms would this lead to for the end of this year and next year?

Well, I will never pull out specific trials within the total spent.

I mean, it is part of what R and D have to manage, the optimal mix of projects over the course of the year in terms of what the business and the product life cycles need.

So I would hate to start a precedent of giving out specific details on that.

But I think in terms of just looking at R and D costs as a whole, yes, we have seen for the reasons I mentioned earlier some increase in the R and D span and we would expect some of that to run into the fourth quarter as well such that probably overall we will see a slightly higher R and D percentage in sales than we have seen in the last year.

The reason why I specifically brought SG and A and the R and D costs at the beginning of the year is that there is a degree of how you manage them at the marketing mix.

Some people will want to do local trials.

Others will do it by other different forms of promotion.

So again, I think we certainly will see some increase in the overall R and D to sales ratio, but I don't think within that you'll ever see in a material way the [inaudible] of any individual trial.

Despite the magnitude of these trials because there's a huge number of people, it's still manageable in terms of seeing only a real small increase in spending?

Depends on what you mean by small, Chris.

R and D costs will grow by about 10% this year an less next.

Again, it's part of the overall management of the optimal mix.

And these are long-term trials as well.

They don't sort of all happen at any, in any one quarter.

They are spread over a very long period of time.

Sure.

On a second subject, Seroquel with the launch of BMS's Bilifi [phonetic] launching next year, how do you see that panning out in the schizophrenia market in the U.S.?

Do you thing there's going to be a [inaudible] arms race and therefore will you guys have to commit more resources to Seroquel [inaudible] for the margins?

How do you see that working out?

There will be a new competitor in there and that will change some of the dynamics of the market.

We are sitting on a strong market position and I think that our market share progression has been absolutely solid.

When people were saying well, what was gee owe dome going to do?

We have ridden through that carefully.

The benefit and attractions of Seroquel are very clear.

We have a strong development program behind it.

We constantly are looking at what the optimal sales force and the promotion mix is.

And we will continue to look at that.

I suspect it is, the BMS project has the [inaudible] rather than ours.

Thanks very much.

Thank you.

The next question comes from Mr. Stan Vesterberg.

Please go ahead.

Good afternoon.

I wonder if you could clarify the [inaudible] of the great income line, is my first question and the second question, regarding the interest payments, should we read this as a one-time impact on the interest

line, the annual reevaluation of long-term equity?

The liabilities?

Will this be ongoing in the U.S. market for some time?

And finally, adjusting for the currency, your operating margin is running somewhere around 22%.

Would that be a sustainable level going forward into 2003?

Thank you.

Okay.

Other operating income, we said at the beginning of the year there would be two aspects of this.

One, there would be further disposals this year.

We disposed of the Pseudla [phonetic] product in the first quarter which was clearly a big gain and part of the reason why our profits in the first quarter were so strong.

The second thing is that one or two royalty payments on which we previously had been having income would decline such that we felt that really from the outset we would see a rather low operating income, but none for the year as a whole because the volume of disposals would be low.

Really we have seen this lower rocks in the street.

That's what you see playing true with a disproportionate share in the first quarter, it must mean that it will be lower in later quarters.

And the third quarter was light compared to the third quarter last year.

And the fourth quarter this quarter will be relatively low as well.

Sometimes these things, you can't always predict the timing of some of these events, particularly the product disposal gains which are linked to the timing of completion of transactions.

On interest payments, the U.S. health care liabilities is an annual reevaluation.

It came in Q4 last year and in Q3 this year.

It is not, in absolute terms it is not a significant event.

But when you look at it in the context of the year yield that we get on our cash, we felt it was important to mention at this time.

The pension funds, again they are a little bit, they are a little bit more predictable in that we do see some of those coming through quarter on quarter.

But again, they are only worth mentioning because we have 23 million of interest

in the quarter.

Otherwise they are really not in absolute terms very significant.

On the currencies, it's been neutral for the quarter with about 150 million on sales appeared about 150 million on costs.

As we go into the second quarter, into the final quarter, there will again be a, I guess, a mixed currency effect.

The quarter, the Euro is strengthening against the quarter, and was particularly strong in the third quarter.

It will be less in the fourth quarter.

For example it was 13 % stronger in Q3 and 17 % stronger in Q4.

On the other hand the Swedish kroner was 14 % stronger and 16 % stronger in Q4.

Our best news is that the currency overall will be one to 2% negative for the year, although that is a prediction with a relatively fine level of precision on it.

At that level the effective currency on margins would be significant.

I'm not sure I would agree that the underlying margin is as low as 22%.

It is not appropriate at this point to really try to project what the margin could be next year because next year's margins also are subject to variations in terms of what sums we have in there about the launch of products and the possible especially tri of generics if it happens.

We will leave that broader question for January, if we can.

Thank you.

Thank you.

The next question comes from Mr. Kevin Scotcher [phonetic].

Please go ahead.

Thank you.

My question is, is the FDA still reviewing the 5-milligram dose of Crestor.

Does your response include the dose range of five to 40 milligrams or only ten to 40?

I am going to push that one into the November 7 meeting, where I think you will have the full Crestor team there to be able to answer that one, Kevin.

I would rather not get into those specifics at this stage.

If theres was anything significant to report, as an event during the quarter, then we would have had that in our press release.

There's really nothing that we have drawn attention to as being different to what

we said when we had the Crestor conference call in August.

Thank you.

Next question comes from Stephen Vickal [phonetic].

Yes, referring one question to your discussions about the Lucent case in the U.S.

S according to the figures I had, the third quarter was the strongest quarter in the U.S. in terms of sales.

Of course that is not going on considering the fact that the number of prescriptions has been decreasing very much over the year.

I can see two different reasons for that.

The first thing, of course, is that we have seen new stocking in the early part of the years among wholesalers because they were expecting generic competition and then when they realized that they need to deliver the products, they are stocking up again in the third quarter, because of the, what has happened there.

That is one explanation.

The other one could be that you actually have the decrease, that is discounts for the U.S. market because [inaudible].

Could you please help me understand the figures behind your sales in the U.S.?

Well, the answer is, the second speculation you had is not the answer.

Again I draw you to the fact that year on year there is nothing unpredictable.

If you do look at the quarter in isolation, we have seen a smaller decline in dollar terms than we have seen in prescription terms.

If there is evidence of between the quarters of more stocking in Prilosec.

But quarter on, compared to the quarter we - compared to Q3 last last year, there isn't anything to draw attention to.

For sure the wholesalers have been looking at what kind of positions they would have prior to generic Omeprazole coming to the market.

Even when we talk about the maximum level of stock we have seen amongst the wholesalers, it has been less than a month.

And so we are talking about less than four weeks' inventory.

And probably a lot less than

that.

This is sort of an average inventory that the wholesaler chain has.

Absent any specific price speculation.

If you have seen wholesaler stocking ahead of price increases, you usually, it usually comes in in the tens or hundreds of millions of dollars rather than the few millions.

So I think whichever way you look at it, Stephen, perhaps there is more stock in there than there was at the end of Q2, but nothing really to say definitively on.

You have to understand that stocking wholesalers is an art rather than a science.

We draw the analysis out from as many different ways as we can to see what is in there.

If there was something meaningful, we would have drawn it to your attention.

Thank you very much.

Thank you.

Next question comes from Mr. Max Herman.

Please go ahead.

Max Herman from ING.

Three quick questions, given your previous answers on anything to do with R and D. You may not be able to answer this, but have you seen any more instances of hepatomalacia [phonetic] from the current trials with Crestor?

First question.

Secondly, just can I just understand margins a little bit more?

The major impact is the other operating income, which I believe was eight or 9 percent of the loss, but given the sales line we would have expected maybe a little bit of benefit in the margins from there.

Is that purely an increased R and D percentage?

Finally, just on the Prilosec experience in the UK, Germany an Canada, can you give us an idea on the attrition rates and whether the generics have entered the Canadian market?

Thank you.

Mike, is there anything that you want to add on Crestor?

The first part of the question?

No, I don't think so, John.

Other than to say there are no further

cases of hepatomalacia [phonetic].

The second part, I think the margin is, the margin movements in the quarter are quite clear.

Over the four and a half percent decline in Q3. 1.9 percent of it is R and D and two-point 1% of it is other income, which pretty well explains the whole thing.

On the attrition rate, Mike, have you got anything specific on trends in the UK?

Or in Canada?

I don't believe there is any generics in Canada, John, as yet.

We have obviously significant generic competition in the UK and in Germany.

I am not sure that attrition in an individual market would have any relevance to any other market.

Thank you.

Next question, please.

Thank you.

Next question comes from Mr. Primo Pavani [phonetic].

Three quick questions.

Given the fact that IRESSA was a rolling submission, is there a specific date we should be looking for.

We were first begin the August 6 submission of the data but it could be earlier.

On Losec and Nexium, given the fact that the Losec generic competition has been delayed, is there a change in strategy in terms of the Nexium sampling or detailing or anything in that regard?

Thirdly on the Losec court case situation again, while I fully understand the company's stance that you won't see generic competition in 2002, is there a risk if there are - plenty of [inaudible], but if shore was to strike a deal with yourself, get the approval and come to market?

Is there a risk of that?

Mike, I'll toss the IRESSA one to you or Ed.

On the Losec court case, it is not appropriate for us to enter into speculations as to what the generic companies might or might not do.

As I say, it is inappropriate time for us to

make that comment.

We will come back to you on the current status in our January annual results call indeed if there is something different at that point.

In terms of Losec and Nexium, there is absolutely no change to need to change our strategy which has been clear that all the resources are positioned at Nexium.

That is how they will continue, to continue to be.

It has proven to be highly successful so far an we'll continue with I in exactly the same way as we have done.

Mike, anything on IRESSA?

ED SAGE:

I think what we would say is that there is a formal process, but I think the review process that we are undergoing file the review is unlikely to be influenced by that formal process.

Thank you.

Next question comes from Mr. Graham Perry.

Please go ahead.

Couple of questions on the [inaudible] franchise.

Can you confirm how the roll out of [inaudible] is going in Europe and what kind of launch we see in the European countries and if there is [inaudible] on the potential competition of perform court.

They talked about launching a generic brand.

Do you have any update on that and impact on potential sales there?

On the operating income line, we saw yesterday black sale provisions quite heavily.

Can you just confirm that your operating income wasn't impacted bid increases in provisioning?

The answer to the third question is no, there are no provisions in our other operating income line.

Mike, Simbacort or Promocort [phonetic]?

We are on the market in essentially all the important markets in Europe

now.

I mean, I think the product is progressing rather well.

I mean, we are very encouraged by simply court's performance.

We have excellent data and we've got excellent, nice data in COBD.

We are looking forward to the product performing well going forward.

On the potential branded competition of [inaudible]?

We are equally aware of the Cephila [phonetic] discussions.

I think the reality it is a complex and difficult formulation and I think there's a lot of intellectual property in the broader sense of the word in terms of manufacturing that would prevent any entry into the marketplace.

Thanks.

Thank you.

Your next question comes from Stewart Atkins.

Please go ahead.

Stewart Atkins from Lehman Brothers.

We have seen with Shearing Plough [phonetic] and Bristol Meyers that, those dying moments of the product cycle, the inventory gets worked down to nothing because thereafter people are using generic.

You are inclined to take a big hit through Claritin for Tamoxifen and Glucophage.

How do you manage it with Prilosec?

At some time it expires the patent.

Will we expect to see a write off of stock which you can no longer sell?

What would you do with this?

The dynamics of what you say is absolutely right, Stewart.

In the same way as you see a growing product, you get in dollar terms more product in the whole, more value in the wholesaler chain.

You see exactly the same thing when a product comes down rapidly.

You see both the loss of prescriptions and that gets exagerated by the contracting of the wholesaler chain.

This is something we have been very conscious of ever since we have seen the generic threat to Prilosec and have always tried to keep our wholesaler inventories as low as we possibly can.

Fortunately, unlike some products, the supply

chain on Prilosec has always been pretty tight.

As I mentioned earlier, we rarely see more than four months, four weeks in the marketplace at any one time.

We try to track it at that point as carefully as we can to make sure that we aren't going to be subject to the dramatic swings that you have seen with others.

I don't think, there isn't a magic solution.

At the end of the day the wholesalers will buy what they want to buy.

If they want to speculate on the price, we can't stop them doing that.

But it is quite clearly one of the variables that we are attempting to manage in the run up to generic competition.

And the Prilosec [gap in audio]

Do you hear something?

Nothing?

It is completely quiet.

Thank you for your patience, ladies and gentlemen.

We are experiencing some difficulties.

Until we resolve it it will be completely quiet.

Thank you.

(Long pause in the audio.)

May we just go to the last questioner, Stewart, and make sure he her the answer before we got cut off?

Operator?

John, we're back on.

I don't know whether we are live or not.

I think we are.

Operator, could you try to connect with the last questioner?

Certainly.

See if he got the answer to the last question.

Mr. Atkins, go ahead, please.

We her as much as you saying that you

hoped to manage the process intensively so that you don't end up with too much of a problem like Shearing Plough [phonetic] or Bristol Meyers did.

And then it went dead.

I think there's two factors.

One the supply chain on Prilosec has been very low.

That has given a, this never has given us an enormous issue to manage.

But secondly, with the scale of wholesaler speculation that you can see for Prilosec, it can ballooon at any point in time.

It's not something that we have complete control over, but clearly it is one of the many variables.

And we are trying to manage with the possibility of generic competition.

Thank you.

Thank you.

Your next question comes from Ms. Myra Goldstein.

Please go ahead.

I'm wondering if you might be able to give us some sensitivity in the gross margin to the effect of Tamoxifen going generic next year?

You mentioned it was very profitable for you.

It is a profitable product, Myra.

It would appear in the mix.

But I don't think in a way that would distort the totality of our gross margin in any significant way.

Clearly there are so many things, so many moving parts that we wouldn't expect to be drawing that out as a specific item.

Is it reasonable to assume that there will be some pressure on the gross margin next year given mix issues?

Well, mix issues ought to take it positively.

If the new products that aren't subject to payments are to Merck are growing more strongly than those, that will give us positive pressure.

That is the largest element that influences the gross margin mix.

If you look at the underlying cost of production, there are many, many moving pieces in that depending on where you are in the production cycle, what the level of utilization is that you have as you move through plant expansion.

Such that in aggregate, it tends to be a reasonably robust number that rarely moves

by more than 1%.

I think 1% movement on the underlying would be quite significant.

So I think in aggregate it is not that sensitive to, norm next is the important product, but it is not one of our largest.

Okay, thank you.

As a reminder, I would tell all parties to press a star followed by a one now.

Next question comes from Mr. Vikram Sahu.

I want going back to your comments on Crestor.

I didn't hear you correctly.

Are you expecting to get approval for increases tell in Europe for this year?

If the answer is yes, I guess the question is, does that make life a little difficult for you in the context of you giving away a launch strategy to Pfizer and the other competitors in the staffing space would have seven months to sort of plan their counter detailing strategy?

Hello?

We seem to have lost John.

He's in Stockholm.

Mike, do you want to have a go at that, then?

Yes, the answer to the approval question is that we expect to get an approval from the Dutch authorities before the ends of the year.

That obviously will trigger the mutual recognition process.

Would that meet the mutual recognition process negotiations would take you, a first launch, would a first launch take place anywhere in Europe before the U.S. launch?

I wouldn't want to get into the details of the timing of the launches of increases tell, Vikram.

Okay, thank you.

I do think we've lost John and we've had about an hour on the call.

I

think we probably have one more question on the line.

Should we take the last question an wind it up?

(There was a long pause in audio)

If there are no more questions, we have probably reached the end of the conference.

Let me on behalf of John in Stockholm thank everybody for their time and good afternoon.

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