AstraZeneca PLC (AZN) 2003 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the AstraZeneca half year results briefing conference call.

For your information, this call is being recorded.

Today's question and answer session will be conducted electronically.

If you would like to ask a question, please press the star or asterisk key followed by the digit '1' on your touchtone phone.

At this time I would like to turn the call over to Mr. Ed Sage, with AstraZeneca.

Please go ahead sir.

Thank you operator.

May I add my welcome to the AstraZeneca conference call for our second quarter and half year results.

Chairing the call today will be our Chief Executive, Tom McKillop and Tom as well as Chief Financial Officer Jon Symonds will be making some preparatory remarks before we turn the call over to your questions.

On line as well are members of our Investor Relations team.

Before I hand the call over to Tom, I would like to read the following statement.

The company intends to make use of the safe harbor provisions of the US 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 actual results in developments to differ materially from those expressed or implied by these forward looking statements.

We refer our listeners to today's press release and to our latest SEC filing on form 20-F for an elaboration of these risk factors.

The company undertakes no obligation to update forward looking statements.

And now over to AstraZeneca's Chief Executive Tom McKillop.

Thank you Ed.

Good afternoon ladies and gentlemen.

I will begin with a quick look at the headline numbers on a strong first half performance.

Then Jon will take through the second quarter numbers in more detail.

Sales of $9.2b were unchanged in constant currency from the first half of last year.

That in no way means we were static.

This unchanged top line masks a massive shift in the portfolio, reflecting the achievements of AstraZeneca employees throughout the world.

The loss of $1.2b of sales in Prilosec, Zestrol, and Novadex in the US alone has been offset by sales from recently launched and high growth products.

Sales of these ten key products increased by 48% to $3.7b in the first half and they now make up 40% of total company sales.

Operating profit was down 10% in constant currency.

Much of this variance is in the other operating income line, with last year's figures including the disposal of Sular(ph.) marketing rates.

The numbers were $211m in the first half of 2002 compared with $62m for 2003.

Earnings per share at $0.93 were down 6% as reported and 8% at constant exchange rates.

Central to our whole strategy is the successful development and commercialization of our new products.

So how are they doing?

Nexium, Symbicort and Hasladex(ph.) selling very well.

The focus is now turning to Iressa and Crestor and we are pleased with their progress.

First, Iressa.

Sales for the six months were $66m.

Happily, the product was approved in the US on May 5 and in the six weeks or so since launch, we achieved sales in the US of $18m.

Expense prescriptions up to the end of June were nearly 5,000.

If we include those patients who still remain in the expanded access program, we estimate that as many as 10,000 patients may be taking Iressa in the USA.

We are also encouraged by the position now in Japan, where sales in the second quarter are returning to a more normal pattern, following a difficult period earlier in the year.

It is already clear that Iressa is a valuable product for many patients with lung cancer, but its full potential will only be evident when we see the results from the ongoing clinical studies.

And now Crestor.

Following the unanimous approval vote from the FDA Advisory Committee, we are now working hard with the Agency to complete the regulatory process, as well as honor preparations for a speedy launch in the USA.

In the meantime we already have launch experience under our belts in 10 countries, although some of it is only a matter of weeks old.

Sales in the first half were $12m of which $9m were recorded in the second quarter.

But dollar sales are a very insensitive indicator of launch progress.

In chronic treatment sectors, such as the (indiscernible) the key indicator is the market share of the dynamic segment of the market, which excludes from the data pool the large majority of patients who simply continue with repeat prescriptions of their existing therapy.

It is this measure which tells us whether we are winning new and switch patients and it is an important factor in projecting total future market share.

Today Crestor is fully meeting our expectations.

In Canada, launch was initially into the private payer sector, which represents about 40% of the Canadian market.

After 21 weeks the launch tracking shows Crestor with around 30% of the dynamic segment.

A similar uptake is seen in the Netherlands with around 50% in 19 weeks and the UK is following the same trend line.

It is clear in all the markets where we have launched that the simple but strong marketing messages around Crestor are getting across and the physicians are acting on this with prescriptions.

So the whole pattern bodes well for the future performance of Crestor as we roll it out into the larger markets.

In summary, a good first half performance with excellent progress on the portfolio transformation.

It is this performance together with the growing confidence about our prospects for the remainder of the year and beyond, which encouraged the Board to raise the interim dividend by just over 10% to 25.5 cents, and to increase our earnings target for the full year to the range $1.65 to $1.75 per share.

That is based on current exchange rates and normal inventory levels.

Now I will hand over to Jon to take you through the second quarter numbers.

Thanks Tom.

I will now build on Tom's remarks.

I will now take you through the second quarter sales and profit performance, including an update on where we now see wholesale inventories.

We will look at costs and margins and a few words on currency.

Reported sales in the second quarter of some $4.4b were up 3.3% in reported terms but down 4% in constant currency.

US sales were down 11% and I will take you through this in more detail in a moment.

Sales outside the US were up 4% in constant exchange rate terms.

Aside from France, Europe remained a difficult market with sales overall down by 2% in the quarter and down 1% for the year to date.

But this has been offset by excellent performances in Japan where we are steadily gaining market share and have now moved up to fifteenth in the sales table.

And in the rest of the world markets where we are not only seeing strong growth from the newer products but also an increasing focus on building our strength in the important de-merging markets.

Us performance has inevitably been influenced by the reversal of the wholesale inventories built up in the first quarter.

But there is no doubt that the transformation challenge is at its toughest in the US.

To record a 4% decline in sales after facing pattern erosions of 43% for the 2002 first half sales, is an impressive performance by any standards.

So let me deal with both of these dynamics.

You will recall that we estimated inventories in the wholesaler chain were around $400m above normal at the end of Q1.

During Q2 we estimate that around half of this has unwound and for two products, Nexium and Seroquel inventories have gone from well above normal to below normal.

Of the estimated net $200m that remained in above normal stocks most of this, or around three-quarters is in a single product, Toprol-XL where purchase in excess of underlying prescription demand continued throughout the second quarter.

Other products affected by inventory movements are covered in the press release.

Excluding generic competition to Prilosec, Zestril and Novadex, which combined has taken $1.2b out of sales in the first half and $556m in the second quarter, the US business grew by 23% in the second quarter and by an estimated 35% on an underlying demand basis after adjusting for movement in stock levels.

Tom has already referred to the launch progress for Iressa and Crestor.

But before I leave the product commentary, I should mention the GI business performance.

Nexium sales for the first half increased 76% in constant currency to just below $1.5b with a solid performance in the US up 74% and in the rest of the world up 83%.

Sales in the last twelve months have reached $2.6b and as I have already mentioned, second quarter sales were dampened by de-stocking, where total prescriptions were up 50% in the quarter, but reported sales were up only 25%.

As for Prilosec, US sales in the quarter and in the half year are down by more than 50% each, as prescriptions to total Ameprisol(ph.) have declined although perhaps more slowly than originally anticipated and as market share is going by the Cudco(ph.) generic product in line with their increased capacity.

In June Prilosec held around 35% of the total Ameprisol prescriptions.

In fact global sales for the GI franchise at $2.9b for the first half are just $214 lower than last year at this time, down 11% in constant currency.

A pretty resilient performance.

Operating profit in Q2 was down 18% in constant currency, as the sales declined from the anticipated de-stocking was accompanied by a 3% increase in R&D and SG&A expenses.

This brings the overall rate of increase in these cost lines to just 4% in constant currency as we continue to tidily manage costs and ensure that resources are allocated to the priorities.

Of course the US launch of Crestor lies ahead and there will be a visible pick up in the rate of cost growth in Q3.

But we still expect the full year increase in R&D and SG&A combined to be around the 5% mark.

Don't forget that although there will be incremental costs incurred on the launch of Crestor, a substantial part of the cost is sales force and will represent a reallocation of resources rather than new investment.

In the first half operating margin was 23.6% of sales down 3.7 percentage points.

Gross margin improved by .5 points to 75.6% as lower payments to Merck as a percentage of sales were offset by increased underlying manufacturing costs, principally arising from a number of one-off items taken in the second quarter.

I have already mentioned R&D and SG&A where the underlying cost growth has been well managed, but the reported numbers continue to be inflated by the weaker dollar against the European currencies.

It won't get any easier in the second half.

In dollar terms R&D grew by 12.5% and SG&A by 10% in the first six months.

Significantly ahead of the underlying 4% and this in itself has eroded margins.

We estimate the currency dampened margins in the first half by just under 1%.

The final piece of the half year margin picture is other income, which accounted for 1.7 percentage points with a decline and is largely attributable to the unrepeated Sular gain made in the first quarter of last year.

For the second quarter, operating margins fell by 4.7 percentage points to 20% of sales, largely as a result of the 3% increase in underlying costs on lower sales.

We estimate here that currency in the second quarter accounted for around 1% of the overall margin decline.

I have already talked about many of the second half margin influences where we will see costs increase, particularly in Q3.

But another important factor is currency.

The dollar weakness, if it continues to the current extent, is likely to increase reported sales to above the 2002 levels with underlying sales marginally down and this will push second half margins below the first half, although overall, we expect to see currency positive to the bottom line and in developing the revised earnings targets to $165m we factored in around $0.4 of currency benefit to earnings per share.

Finally on financial management our cash flow continues to be strong and our cash resources at the end of the quarter amounted to $3.9b after settling the Zolidex investigation and repaying $300m of debt.

You will have noticed that the share buy-back is running well behind the run rate required to complete this year the $4b target set by the Board.

So far this year we have only repurchased $300m of (indiscernible) shares.

The reasons are obvious given the flow of the product news during the quarter and given the likely news flow in Q3 I doubt whether we will make up the lost ground in the second half.

Finally the Board has increased the interim dividend by 10% as our signal of our confidence in the pace of the product transformation.

I will now hand you back to Tom, for closing.

Thanks Jon.

Maybe before we begin the q and a, I will say a word or two about Exanta(ph.).

Exanta is the latest of our pipeline products to reach the critical final stages of development.

It is a breakthrough (indiscernible) class product in an area of high unmet need.

As a result, its development has been true clinical research.

We set out to address three critical questions.

Today as we approach the end of the clinical program involving 30,000 patients we are close to having the answers.

First would an oral direct combinin(ph.) inhibitor be an effective anti-coagulant.

The answer in trial after trial including the (indiscernible) treatment study reported last week is unequivocally yes.

Second could Exanta be used with the standard fixed dosing regimen without the need for coagulation monitoring?

Once again, we have a clear yes from the development program.

Third, would the occurrence of major or minor bleeds prove to be a problem?

Very encouragingly it appears that in chronic use with fixed dosing, bleeding is not a significant problem.

So potentially we have a very exciting product showing great efficacy in an area of huge medical need.

Now as we carried out this large critical program a fourth issue emerged.

It became evident that a percentage of treated patients showed an elevation of liver enzymes.

During a drug's development any signal for hepato-toxicity must be taken very seriously.

With excellent efficacy demonstrated, we believe that this is now the major remaining issue for Exanta and it will certainly be a key feature of the regulatory review.

The Exanta development program is large by any standards and we have an immense amount of data to analyze, interpret and write up in support of the registration package.

The remaining work includes detailed clinical follow-ups, seeking the opinions of world experts and our own researches into understanding the phenomenon.

Since this work is not yet complete, conclusions reached on risk benefit at this stage can only be preliminary.

Whilst I fully understand your desire to calibrate the liver contribution to the risk side to the benefit to risk equation, it simply is not possible nor sensible for us to respond to highly detailed questions on individual pieces of the jigsaw at this stage.

So I will be publishing further file data throughout the year.

It is our view that the risk benefit profile of Exanta will only be clear when all the detail is in and the analysis is complete.

What I will say is that based on the information available today and bearing in mind the excellent efficacy on the (indiscernible) of Warfarin, we believe that the risk benefit profile of Exanta remains strongly positive.

However, I remind you again that it will only be when the analysis is complete that we, you and most importantly the regulators, will be able to judge where the final balance lies.

So now we will take your questions.

Thank you Sir McKillop.

The question and answer session will be conducted electronically.

If you would like to ask a question please the star or asterisk key followed by the digit '1' on your touchtone phone.

We will take questions in the order received and we will take as many questions as time permits.

Again please star '1' to ask a question.

Please stand by while we assemble the roster.

We will take our first question from James Ollwell of Merrill Lynch.

Please go ahead.

Hi Tom, Hi Jon.

I have two questions.

One on Prilosec and Nexium and I was wondering if you could just could talk about your GI franchise in the context of reallocating the sales force in the context of OTC Prilosec and in the context of the recent price cuts of generic Prilosec and Amepresol from Schwartz.

Then secondly a simple financial question.

Are you able to break out a little further the components of the other income line please.

I will maybe answer on Prilosec and Nexium and then Jon can add anything that he wants to add and pick up the other income line, James.

Thank you.

The nice thing about the Prilosec, Nexium, the whole story there is we have essentially retained 90% of our GI business and this stage which is pretty impressive.

Of course we were a bit more generic at (indiscernible) to see through the course of the remainder of the year.

I think our plans are not being changed at all significantly by the OTC or the recently announced price cut from Schwartz.

We don't see any need to reallocate our sales force to deal with either of those markets and the big reallocation of sales force will of course be in relation to the Crestor launch.

That's going to be extremely interesting to see how that plays out and we have put some very interesting (indiscernible) lines that we will be monitoring carefully in the US.

The price on generic, that's for them to decide.

They must optimize their business as they see fit and I don't know how much manufacturing capacity they have.

I would point out that they only have approval for the 20mg so the 10mg and 40mg business won't come their way and indeed they are still high priced at 6.5% price cut.

They are still high priced relative to other proton (indiscernible) inhibitors.

But as for them, that is a matter for them.

OTC.

We have really analyzed upside down, inside out and we remain of the view that it will not significantly impact Nexium at all and not impact to any great extent Prilosec.

Jon, over to you.

We are pretty good now at modeling all the variables around pilot (indiscernible).

We have certainly been tracking Cudco's (ph.) capacity and are slightly tempted to take into some account for some time the possibly impact of the OTC but it is really as I think Tom says, that I don't think it is going to have a dramatic effect on the shape of the private sector erosion.

I think it is still really going to be more determined by Cudco's manufacturing capacity.

I think it is also relevant to note that we still do have the 10mg and 40mg and we have a fair bit of contracting business that the generic can't get at.

So there is a little bit of resilience in there.

But we have really factored all of that into our forecast when reaching our guidance.

On other income James, there is nothing really exciting in there.

There is always a few odds and ends.

We have as you know, disposed of the Marlowe business and frankly that gain was wholly significant in terms of the total for the quarter and there was a settlement of a long-running dispute in there also but nothing that I would really draw to your attention in terms of continuing or anything that was really big enough to point out as a one-off item.

There is always going to be a flow of small items in that income line.

Okay.

That's great.

Thank you very much.

We will now move to Stewart Harris of UBS.

Please go ahead.

Good afternoon.

Thank you very much.

Just three quick questions.

Two relating to Iressa.

Very early days, any sort of stocking at all in Iressa in the US and then any issues in discussions you have had?

How many of the Iressa patients are going to be Medicare reimbursed patients and consequently you will find it difficult to get reimbursement?

How much would that limit the potential patient base do you think in the US for Iressa?

Could you maybe talk to us a little bit about the pricing strategy you have adopted on Crestor in the countries you have launched the product thus far?

Thank you very much.

In Iressa we had a little bit of initial stocking and that has truly unwound I think, by the end of the half, so there is no stocking to speak of in Iressa.

What you are seeing in ongoing sales now is really much in prescription factor so no stocking in there.

As far as reinvestment is concerned it is not proving to be an issue at all with Iressa.

It is being picked up by pretty well all plans and we do of course have a patience assistance program for those people who are not covered and the poorer end of the spectrum.

So we don't want to deny the product to any patient who can really benefit from it.

But reinvestment is not an issue.

As far as Crestor is concerned, yes, I mean we told you that we would be pricing within a band and we would also be pricing country by country appropriate to the market circumstances.

But if you look across the ten markets in which we have launched to date the basic pattern is so far is parity pricing with Lipitor (ph.).

We have priced a bit lower in a couple of countries and that is certainly true of Mexico and Canada.

But it has been broadly Lipitor parity.

Our view here is that price should not be a block to the successful uptake of Crestor.

We believe we have a better product but in today's world I don't think you can really heavily premium price.

Thank you very much.

Thank you.

We will take our next question from Catherine Arnold of (indiscernible).

Please go ahead.

Hi Tom and John.

I have a couple of questions.

First of all in terms of Crestor.

The existing (indiscernible) in the category have clinical compares of themselves versus other statins and you have obviously done a significant amount of work in comparing your brand to those on the market place.

I would expect as a minimum that you would have this in the label and obviously that is important because whatever is in the label can be in promotional aids.

Do you think that that assertion is reasonable and do you think that there is a possibility that the conclusion of the FDA review was that Crestor was superior to two times equivalent to a sample of the (indiscernible) in the label.

I know you are probably going to say you can't that.

Labeling discussions but I wouldn't mind a reaction there.

Additionally, do you expect with (indiscernible) action date would be reasonable to see a launch immediately after the Labor Day bank holiday here in the US?

Then lastly if you could just comment, I had seen in a couple of marketing rags that P&G has indicated they have exclusivity for their OTC (indiscernible)sector during a joint venture.

Is that true such that you wouldn't expect to see any additional OTC entrants for three years protection?

Okay, Catherine.

Good questions.

The labeling of Crestor is obviously being actively discussed with the Agency and until it is finalized I wouldn't want to say too much but we did very good head to head comparison studies and it would certainly be my hope that those clinical results would as normal be in the label in the US.

That would tend also to be consistent with FDA practice.

They like to see clinical results in the label.

So that would be my view.

I am not going to comment at all on whether superiority was going to appear on the label.

I think that is something for the FDA and ourselves to decide at the last moment.

As far as other markets are concerned, if you look you will see that we do have a lot of clinical data in labels where you can get it in and that would certainly be consistent with the whole development program.

P&G - my understanding is that they have a three year exclusive period and after that, let's see what happens.

So regardless of what happens on the Prilosec litigation front the only OTC Prilosec should be the Proctor and Gamble as a (indiscernible) compound.

Well I have to say that I haven't been through that in detail with the lawyers and it is possible that there are some legal circumstances where that might not be the case.

But my understanding is that they have three years' exclusivity from us.

Okay.

Then the last point was regarding if you have a positive outcome on August 12 as expected, could you be turning around a launch post Labor Day?

I hoped you would have forgotten that one, Catherine.

No, I said in my introductory comments I mean we are working very hard to be ready to go as soon as we can get the label printed.

Okay.

Thank you very much.

We will now take a question from Mark Purcell of Deutsche Bank.

Please go ahead.

Thanks very much and good afternoon, gentlemen.

A few quick questions.

Ex Prilosec, Norvex and Zestril your sales growth is 34% in the first half.

Given that the sales force is approximately flat in absolute terms, could you tell us roughly what the underlying EBIT growth is at those three products.

Secondly you have provided with new (indiscernible) with Crestor, for example in Canada and Holland.

Could you provide us with an insight into what proportion of sales have come from patients switching from other statins.

The third question on Prilosec.

I wonder if you could update us on the timing of the Prilosec appeals court case versus Schwartz Pharma and whether you expect the decision to hold up the second wave of generic challenges until 2005?

Lastly on Exanta, could you confirm that this (indiscernible) study will be presented at the (indiscernible) in Vienna and when we see the full publication in (indiscernible) in the upcoming journal, are there any other significant side effect issues you believe are going to be in there perhaps related to other actions of inhibiting thrombin and the inhibition of trypsin as well?

Well that's quite a list.

Jon do you want to pick up the EBIT?

We don't normally break it down to that extent.

I mean obviously all three of those products have not had any costs allocated to them for some time, none of them have been promoted and obviously with Prilosec all of the resources have been added to Tenexium(ph.).

So to that extent as these products go off patent you get a fairly clean drop through in terms of the contribution.

But I wouldn't want to break it out because that is not really how we look at a profitability.

We look at each product and allocate the most effective resources against it, so we have not taken any different decisions as a result of what's happened to those three products this year than we did last year.

We manage our resources on a priority basis.

Okay.

On the Crestor question and patients who are switching, I indicated that about 50% after twenty weeks, or thereabouts seems to be the pattern in markets of the dynamic sector which is switch patients and new patients.

If you actually look at the switch patients then you find we are taking a higher than 30% share which is excellent.

I mean it is very clear that the message is out there and has been well understood that Crestor is a most effective product and that if you get a patient who needs to switch, or isn't reaching goal or whatever, they are going straight on to Crestor.

So I think that is very encouraging for us.

Overall, what is the proportion of sales do you think has come from switch rather than denovo patients?

It would be different in different markets.

Just take the global figures I have given you at this stage, Mark.

Sure.

The other thing, it gives me an opportunity to make another point though about Crestor.

About 80% of the use of Crestor is in the 10mg and a very, very small percentage if 40mg which is also tremendously encouraging.

The patients are going straight in there, they are going straight to go and it is completely consistent with what we saw in development, clinical studies and indeed consistent with the launch platform (indiscernible).

All the soft elements of launch tracking say this is going very well.

Prilosec.

Now the question of Prilosec was around the court timing, I think, wasn't it?

Yes.

We don't have timetables either for the second wave or indeed for the appeal.

We don't have precise timetables.

As far as I can go at this stage, Mark, is to say we don't expect either of those things to be resolved before the yearend.

Exanta.

My understanding is that we will be presenting at the ESC in September and that will be around (indiscernible).

We will present (indiscernible) 5 I think not in September, but in November at the AHA meeting.

So that is the presentation plan at the moment.

As far as other Exanta side effects are concerned.

I mean we have obviously looked for anything else that might be associated with the mode of action of Exanta.

My summary at the end of my introductory comments says it all.

As far as we are concerned the only issue now is this drug is an excellent drug and it will be an interesting discussion with the regulators on benefit risk.

Thanks Tom.

Okay.

We will now take a question from Stewart Adkins of Lehman Brothers.

Please go ahead.

Good afternoon Tom and Jon.

Three questions and two of them are follow-ups really to what has gone before.

Concerning Prilosec, you have already said that contracting business in a 10mg and 40mg are effectively not eligible for Schwartz to take, but Schwartz has already said that they have not achieved full capacity and that's perhaps one of the reasons why they have cut the price.

I am just wondering what percentage of your remaining low set business is still dependent on the contracts and on the 10mg and 40mg business?

So what is the core business if you will which is still not eligible for Schwartz to take and do you have any brand for generic deals with retailers or some formularies which allow you to hang on to more volume than you would otherwise be expected to do?

Secondly on Crestor, what percentage of the statin patients are in effect not reaching goal and therefore eligible for switching?

So just to give us a sense of how quickly Crestor would take share.

Finally on Exanta and I know you said you don't really want to get involved in detailed questions, but are there any trials that you are doing which involve lower doses in patients with impaired kidney function?

Kidney function.

I don't know the answer to Exanta, kidney function.

I don't know where you are going with that.

Should I explain.

My understanding is that if most of the patients, if not all of the patients in the study so far have been screened for normal kidney function, if you enter a normal population then the ...

Oh, I see.

We obviously look very carefully at that and whether you are going to get (indiscernible) effects from a higher blood level because ..

Okay.

I understand that.

No there are no particular new studies underway of that sort and we understand that picture pretty clearly so I don't think there is anything new to be said on that.

As far as the private breakdown, I can fully understand why you want the information, but I don't think we will go there.

Crestor.

The percent of patients not reaching goal will depend on country by country and the use of Lipitor(ph.), (indiscernible) and so on.

But in some places you are seeing 30% of patients who aren't getting goal on any of the existing statins.

This is the percentage which you think you are attacking and getting a big share of.

Yes.

We will get a big share of those patients.

Yes.

The switching isn't only because of no gain to go.

I mean some patients will tolerate one statin better than another for instance.

I mean this is true of all classes of drugs.

But you have got a significant percentage of patients who do not reach goal and in demonstrated (indiscernible) studies and indeed in their own studies and those patients..

The issue for many doctors will be if they have started a patient for instance on 10mg the drug is started.

The patient comes back and they have not a goal and should the doctor switch that patient to Crestor 10mg or should they begin by trading up on another statin and I am sure you will see both.

But everything we are seeing, we are getting a high percentage of the total switch.

And is the high percentage of the total switch taking place in markets where azetomide (ph.) is already available?

Azetomide I think is available in the Netherlands.

It launched in the Netherlands.

I am looking at the guys here to see if anybody knows for sure.

We need to get back to you on that.

Look at the pattern for Azetomide, we are not worried by it at all.

I don't think that's going to be a big issue for us.

Thank you very much.

Okay.

Thank you.

We will now move to Andrew Baum of Morgan Stanley.

Please go ahead.

Good afternoon, Tom and Jon.

A few questions if I may.

First on the PPIA market.

I wonder if you could express your comfort level with current market estimates for your PPI franchise going out for five years around the $5b - $6b mark.

Given the environment and giving comments from Tom Scully along the lines of 'physicians who prescribe Nexium ought to be ashamed of themselves'.

Just some general comments there.

Second, you did give the breakdown by dosages.

I wonder whether this is for Crestor, you could give the breakdown by prescriber primary care versus cardiologist?

Just an overall impression of where the initial growth is coming from.

Thirdly a question for Jon.

Could you give us the capacity utilization currently for Crestor, Iressa and Seroquel and give some idea of how that relates the evolution of gross margins over the next twelve months or so.

Then finally, I wonder if Tom might think about giving us an early steer on the earnings guidance for 2004?

The answer to your last part is 'No'.

I guessed that one.

It is January and I am glad Jon is going to answer the third part of your question.

PPIA market share.

I have said a couple of things consistently right through the period.

I have said that we would retain the majority, the considerable majority of PPI business, GI business and that we would continue to be the number one GI company.

Both of those things we are comfortably achieving at the moment and I see not reason with the kind of growth that Nexium is experiencing, not just incidentally in the US but also in the rest of the world where the growth for this first half is actually ahead of the growth in the US so I see no reason to revise those views.

By the way Tom Scully has moderated his comments after some discussions with us.

I mean some of the stuff he said was just simply, factually wrong and they have accepted that.

So that is the position with Tom Scully.

Primary care cardiologists.

It has got very high awareness in both groups and I am sure there is very good prescribing going on in both groups Andrew.

The precise numbers again would be country dependent and I don't have that detailed breakdown and I probably wouldn't share it with you anyway.

The third part Jon, is over to you.

Thanks Tom and if I wasn't strapped in, I would have left by now.

As you know, Andrew, the profile on many plants or on many products follows a bit of a sore tooth approach.

So clearly with Crestor and Iressa we are making sure that we have got substantial capacity headroom in order to take account of both our current forecasts and significantly ahead of our current forecasts because obviously we never want to be in a position in this industry, is to be short of products.

So we are clearly building in a lot of headroom and as you can tell from that Crestor will be at a very early stage in its production levels and its life cycle.

So as the production ramps up we will clearly see more efficiency coming from that plant and to some extent Iressa is in a similar position.

Seroquel being more mature we tend to put new capacity on a couple of years before we see the current capacity reaching the peak of its utilization.

I think from that, and I think we have had this discussion before, that it is actually very difficult because all of the products follow different patterns.

It does tend to even itself out such that you don't see significant swings in the total cogs line.

Having said that, we do believe that we have got more efficiencies that we can take in our manufacturing process such that there is an opportunity to reduce our cost of sales beyond that from the mix effect that will come from Merck.

But it really follows a really dampened path and you really will only see progressive improvement in it rather than any step change as a result of any one product.

It really is a quite and large and fairly insensitive number from quarter to quarter.

Thanks a lot.

We will now take a question from Max Hermann from ING Financial Markets.

Please go ahead.

Hi, Tom and Jon.

Thanks very much.

Three questions.

Firstly just on the levels and how your marketing strategy in Canada and Netherlands currently with regards to sampling, whether there has been very high sampling particularly in Canada.

Also maybe just a little bit of a view on obviously the FDA Advisory Committee meeting was very encouraging and particularly with regards to the recommendation for the 40mg dose.

Has that given you support for your upgrade and recommendation?

In other words do you see that the marketing levels that are required to achieve these sort of shares that you are doing in Canada in the Netherlands and the US may not require as much financial muscle power.

Then finally just on Losec and the stocking issues.

It seems obviously that you had a very strong quarter for Losec and whether the wholesalers are taking a different view in terms of the likely decline in that particular product.

Okay.

Before I answer those, I would like to go back to Stewart Adkins' earlier question on markets in which (indiscernible) had a launch.

One of the guys has reminded me that it has launched in the UK and in fact I do recall now seeing market research data on awareness of (indiscernible) and on comparing that with Crestor in the UK and I can tell you physician awareness is miles higher for Crestor than (indiscernible).

So again that confirms for me that we don't really see that as a major obstacle to us.

Coming to your questions, Max.

Sampling I would say is normal.

There is nothing unusual about our sampling patterns around Crestor for a primary care launch in any of these countries.

The FDA position.

Yes, it was a very good advisory committee meeting.

We felt that the strength of Crestor, of the whole clinical data came out very strongly through that.

We hope that will be reflected in the label.

It does look as though there are no fundamental obstacles to a prompt approval and therefore we were encouraged in our upgrade in the fact that we fully expect the US in the second half and perhaps in the earlier part of the second half, a little bit earlier maybe than we had originally planned.

So yes, that's all been in a total sense reassuring rather than us revising any of our numbers particularly around Crestor.

As far as the Losec stocking position is concerned and whether various wholesalers or indeed other parts of the chain have been revising their views, I am sure they have been in the light of the pattern and the decline pattern.

They monitor it as carefully as we do.

So, yes.

I think that is being reflected in the numbers.

But I would make a point that we have made to you before so that there are no surprises.

We are managing our whole stocking position on (indiscernible) very carefully so that we would not expect, even if there was a significant downturn, we would not expect to see that hit the point in a negative way, in a big negative way.

So it is not as though we are going to allow large levels of inventory out there.

They can come back to haunt us.

Could I just follow up on that?

Do you know what the current stocking levels are then of Losec in the US?

Just another quick question.

Obviously you have mentioned that the UK launch was also tracking with the Netherlands and Canada.

I find that surprising given the traditional comment that the UK is a very conservative physician market and we would probably expect a slow uptake, if anything.

I will get Jon to deal with the levels of Losec.

As far as the UK is concerned, you are absolutely right.

The general penetration of all new molecules in the UK is slower than in almost any other developed country and the same I expect will be true with Crestor.

What we are looking at though is the percentage of that dynamic segment which is coming to Crestor and that is in line with the other markets.

But actually the whole uptake of all of the new products is so.

I hope that is clear.

It is at an earlier stage, so maybe week 14 or something and at week 14 we are at exactly the same point as Netherlands and Canada was in terms of percentage of that dynamic segment.

Yes, Max as you well know it is not a precise science estimating wholesale inventory, but we really as Tom has said, been putting a really very, very close scrutiny on our exposure in the Prilosec supply chain and obviously you get some visibility into the wholesaler chain.

But there is the retail side and there is also the mail order, where we have been really trying to evaluate as carefully as we can where the trends are going and clearly the trends have been coming down in line with the produced prescriptions and (indiscernible) the absolute level of inventory comes down as well.

That's really the exposure that Tom talked about that we are trying to manage, so that we never find ourselves with a nasty surprise if it contracts faster than we expect.

We have been managing very carefully both the clinical and financial exposure that we have to Prilosec and so far we seem to be doing it pretty well.

We will now move to Alexandra Hauber of Bear Stearns.

Please go ahead.

Good afternoon gentlemen.

Alexandra Hauber from Bear Stearns.

One follow up question to another question.

Just to come back on that Prilosec stocking level.

I am just trying to add up all the pieces of information you have given and basically if you say that you are managing the stock levels carefully, then I imply that that means you pretty much don't have extra stocks.

Now if I then compare first and second quarter prescription trends, prescription trends are down in (indiscernible) by 50% then that means you either have had almost a 100% price increase or you had significantly under-stocked at the end of the first quarter, which means that the 400 excess inventory was actually a net.

Even a bigger figure.

Or the prescription trends really don't matter because they have such a huge amount of contract business.

Which one of the three is it?

Well, a mixture of all of them.

I think there are elements of all of that in it Alexandra.

If anything we would put the physical of Prilosec inventory out in the wholesalers where I guess is data is best is being a little below what we would expect.

But clearly why I picket out those three components is that we have different levels of business with different parts of the chain and we have now tried to amalgamate it all.

But I think, as we have said before, you really can't work off reported sales, you have got to work off gross sales and that really tells you how many units are out there and to be able to get between gross and net you have to take into account reserves, rebates, discounts and so on and that's not visible to you.

So we try and factor all of these things in there and our best judgment is that the inventory levels in the wholesaler chain are a touch below normal and that we think we have got pretty good visibility on the financial exposure that we are carrying.

But unfortunately you can't triangulate all of those pieces in the way that gives you a perfect answer because all the pieces don't exist, or they are not certainly visible.

So what would you advise us what we should do with the prescription trends?

Keep watching them or not?

No, I think the prescription trends clearly do tell you, do give you a picture of where the demand is going, but it doesn't give you a full picture on all the contracting.

I would advise you to concentrate on next year.

We do that too, Tom.

There are two other questions.

Just briefly on the gross margin.

You mentioned you had a couple of one-offs in the second quarter.

Any chance you can give some more color and even some quantification?

I guess what I am really asking is, given that you had much lower GI sales it looked like underlying, adjusted for the payments from Merck, it was about 2% down.

We had a long debate at the first quarter about gross margins, because in the first quarter it was considered low.

Just to get a feel of where they roughly are.

Then the third question on Casodex.

It just looks like in the US it has now been flat for a very, very long time apart from the stocking effect this quarter.

Any chance to get that back to gross?

Where are you with your invitation for early stage for (indiscernible)?

And why is it so different outside the US?

The (indiscernible) for the US is they do not have the 150mg tablet, because the early prostate cancer use was not approved in the US.

Is that therefore dead or is there .....?

Well, it is certainly going to take some time if ever we can persuade the FDA that (indiscernible) is a good measure, a good surrogate(ph.) for early prostate cancer.

The evidence is overwhelming, but on measuring PSA, but if they want survival data in early prostate cancer patients going out for years.

In the US patients are very well treated for prostate cancer.

They are picked up early and they are very well treated by (indiscernible) measures.

But we can show a benefit in (indiscernible) in terms of the emergence of elevations in PSE.

We can show a benefit in total best treatment.

But that is not convincing to the FDA to give us an approval at this stage.

I think they are absolutely wrong and Casodex is doing tremendously well outside the US.

In (indiscernible) it is about 46%, something at the half year.

So we are feeling it is a very impressive performance but 43% (somebody has just told me I am wrong), so 43% I will settle for.

Casodex is doing very well, but it has got a limited sort of headroom in the US because it has got something like 80% market share.

It really absolutely dominates the Anti-(indiscernible) market.

Unless we get weight of use and a 50mg tablet isn't an option really for early prostate cancer.

Thank you.

On gross margins, Alexandra, over the half year as I mentioned, the gross margin improved by about half a percentage point which contained a positive on the proportional payments to Merck and a slight negative on our underlying costs of sales.

I don't want to go into all the specific pieces.

But I would say the one-offs, the absence of them, would have added about half a percentage point to our gross margin in the quarter.

Operator, perhaps we could take two more questions.

Thank you sir.

We will take our next question from David Marskowitz of SDR.

Please go ahead.

Thank you and good morning, or good afternoon.

On those gross margin issues, the one-offs, did you mention that those were unique only to this quarter so in fact based on your last comment should I take the gross margins up going forward by that 0.5%, (indiscernible) cost of goods issues?

Secondly, could you comment on the US price of Nexium relative to the current price of generic Prilosec from the managed care perspective?

Thank you.

Yes I gave the half year without trying not to give you too many numbers for the Q2 and the half.

I mean there is always going to be a bit of adjustment in the manufacturing base and I think that over the course of the year we are looking for a positive improvement in gross margin.

But it is going to predominantly come from the mix effect on Merck and I suspect that averaged out over the course of the year, you will see a fairly small benefit on our total goods line, cost of goods line.

Really for the reasons that I said, the answer I gave earlier to Andrew's question, was that it is such a big number, relatively, that it is pretty insensitive to one-offs factors overall.

We would expect to see small improvement for the next year or so.

But predominantly an improvement to gross margin is coming from the mix effect.

David your second question around US Nexium in place in comparison with generic metrizole (ph.) is actually an extremely complex and difficult one.

What price are we talking about?

And to who? (indiscernible) healthier plans are going to have particular agreements, price volume agreements and so on and I don't know exactly what the Schwartz offerings are to different parts of the user groups in the US, so it is actually extremely complex.

The key thing for me is that generic metrozole was introduced initially at a price, it is the base price, which was higher than (indiscernible) and (indiscernible).

And immediately could take a block of business because there were plans which were almost committed to taking a generic, irrespective of price because that was the policy, maybe enforced on them by peer groups or whatever.

Schwartz have obviously picked up a lot of that business very quickly.

We are now out there having to really compete and I think you will see price and the price offering in the generics area change as their capacity builds up and presumably their capacity is now such that they are prepared to compete.

But that is going to be a tricky game for them to play in terms of optimizing the return and to me it doesn't really affect Nexium, because we have already had (indiscernible) and (indiscernible) out in the market at much lower prices than Nexium.

We are driving Nexium on clinical benefit.

That is the position of Nexium.

It is the differentiated product that has in clinical trial demonstrated itself as superior.

That is how we will go on promoting it in Europe.

It is not a price war Nexium with a generic metrizole.

So for (indiscernible) we could say are significantly lower in price than Nexium at this point.

In terms of (indiscernible) healthcare (indiscernible) really, yes.

Thanks very much.

Okay.

Last question?

Thank you.

Our next question is from Steffan Wicklund of Rhodia Securities.

Please go ahead.

Yes.

Actually the last question will be two.

The first one regarding Symbicort.

We have high hopes with this product that it will become a blockbuster and it is performing very, very well and now you announce in the report that the filing in the US will take place in 2005.

That is as I understand about one year delay compared to what you have said earlier.

Could you please comment upon that?

The second question is regarding Crestor and the launch costs for Crestor.

For us, outside the company it is really a black box and you can do whatever you want with those costs and pushing the EPS up or down with a few cents without us knowing exactly where it is coming from.

So could you please give us some further information about the launch costs for Crestor for this year?

Thank you.

Okay.

You are absolutely right on Symbicort.

Symbicort has grown 79% in the first half to about a quarter of a billion dollars in sales.

And of course we have got the US to come, but with that tremendous growth - and by the way we have just steadily taken market share from (indiscernible) or (indiscernible) the GSK product.

We believe we have a better product.

We believe we will be able to demonstrate that with clinical results.

The issue in the United States is that the design of the studies which the FDA requested, require 12 hour follow-up and that has slowed down the recruitment rate and made it more difficult to get those studies completed and we have adjusted the timing to reflect that.

It will be less than 12 months to the (indiscernible).

We are talking about pushing it back a bit.

It will really all depend on the recruitment rates and the completion times for those studies.

The program is totally agreed and it is motoring, it is moving forward quite nicely, but because of that design request of a 12 hour follow-up when you are dealing often with children, you can imagine that makes it very tricky and getting the patients into the study is slower.

But we will do it - it will get done and we are very confident with Symbicort.

We think it is an excellent product.

As far as Crestor launch costs, it is the most common question I receive Stefan and I am not going to answer it, because I am not going to commit to a particular figure.

All I can tell you is that we will be launching in the second half in the US.

We will absorb the majority, pretty well all of those launch costs in the second half of this year and that is factored in to our revised guidance raising all the earnings per share for the year.

With that, can I thank all of you for your participation and I would like to just remind you that we have an ABR (ph.) meeting on October 2 and also that we have published this morning, or just put up on the internet the general presentations, the slides we will be using in the general presentation as we meet with institutional investors over the next few weeks.

Thank you again for your participation.