AstraZeneca PLC (AZN) 2004 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to today's third quarter results conference call.

For your information, today's conference is being recorded.

At this time I would like to turn the call over to your host today, Mr. Ed Seage.

Please go ahead sir.

Thank you operator and good day everyone.

Chairing the call today is John Symonds, our Chief Financial Officer.

We're joined by Mike Rand, Vice President Corporate Affairs, and our Investor Relations team.

Before I turn the call over to John, I'd like to read the following statement.

The Company intends to utilize the Safe Harbor provisions of the United States Private Security Litigation Act 1995.

Participants on this call may make forward-looking statements with respect to the operations and the financial performance of AstraZeneca.

By their very nature, forward-looking statements involve risks and uncertainties, and results may differ materially from that expressed or implied by these forward-looking statements.

The Company undertakes no obligation to update forward-looking statements.

I'll now turn the call over to John Symonds.

John?

Thank you Ed and good afternoon everyone.

On this call I'll cover the following topics - the headline results; the exceptional items in the third quarter; key product highlights - and since we had a thorough review of the performance of many of our key brands earlier this month at our annual business review, I'll make those brief; trends in costs, margins and currency; the outlook for the fourth quarter and the full year; and finally, our timetable for releasing restated financials under International Accounting Standards.

And then we'll turn the balance of the call over to questions and answers.

So first the headlines.

Sales for the third quarter were $5.3b, up 7% in constant currency with exchange benefits adding another 3 points, to give 10% reported growth.

Operating profit was up 16% in CER terms, that's up 15% in reported terms with exchange being marginally negative.

Earnings per share before exceptional items of 55 cents were up 17% in reported terms and 19% in constant exchange rate terms.

In addition, in the quarter there were 2 exceptional gains, totaling 17 cents per share.

A net gain of $219m on the disposal of our share of the Advanta joint venture, and a tax credit of $58m related to a portion of the Zoladex settlement in 2002.

Although it was not treated as an exceptional item, we've taken an $80m provision, that's getting on for 4 cents in earnings per share terms, against inventories and assets associated with Exanta following its non-approval by the FDA.

This represents around half of the assets which can be directly attributed to Exanta.

These items aside, the shape of the third quarter is very much in line with our expectations as to how 2004 would develop.

That is solid momentum for the key growth products, with a stronger second half than first, particularly as the excess wholesaler inventories in the U.S. unwound.

When this is combined with a marked slowing in the rate of growth in R&D and SG&A expenditures, it gives rise to strong growth in earnings with a strong second half bias in terms of phasing.

So let's start with sales, and let me first deal with wholesaler stocking.

The good news is that inventory management agreements in the U.S. are beginning to take effect.

Inventories today are now broadly at target level in aggregate, with most products at less than 1 month's supply.

Consequently, sales during the third quarter are reasonably close to underlying demand, except for the unwinding of the $75m in excess inventory we had at the end of quarter 2.

And over the 9 months of this year, we estimate that U.S. reported sales are getting on for $500m lower than underlying demand would suggest.

When you adjust for these inventory movements, the underlying momentum of the business becomes more evident.

For the 9 months, reported U.S. sales growth is 4%.

With adjusting for these inventory movements, it increases to 12%, lifting Group sales -- the Group sales growth rate from 6% to 10% in constant exchange rate terms for the 9 months.

And for the quarter, underlying Group sales grew by 11%, the strongest rate we've seen for the year so far.

On the same basis, our sales of key growth products were up 35% for the quarter and for the 9 months, for both the U.S. and the Group.

A growth rate that has been sustained throughout every quarter this year.

So for most products in this quarter, any apparent disconnect between the underlying growth rates and reported sales growth is primarily a function of what happened last year.

And these are all flagged in the press release.

This will, however, continue for another couple of quarters yet.

Progressively, reported sales and underlying demand will come together.

Briefly then, third quarter performance with some of our key brands.

Nexium is a perfect case in point of what I've just been describing.

Significant wholesaler stocking occurred in the third quarter last year, ahead of a September price increase.

And this compares to de-stocking of the residual excess inventory carried forward from the second quarter of this year.

Together, this led to a 17% decline in reported sales.

Underlying this, the key measure of performance of this bench tablet volume was up 17% in the quarter.

A sound performance in the dynamic U.S.

PPI market we described in some detail at the ABR 3 weeks ago.

Nexium sales outside the U.S. were up 34% in the third quarter.

Crestor sales in the quarter were $260m and for the 9 months they're just under $600m.

Before specifically coming to Crestor performance, it's worth highlighting how growth in the U.S. statin market has really accelerated over the course of this year.

From a 2003 prescription growth of 6%, the trend for new prescriptions for the first 3 quarters of 2004 are 12%, 14% and in the third percent -- third quarter, 18% versus the same period last year.

This highlights not only the promotion sensitivity of the class, but also the consequences of lowering LDL targets.

Crestor prescription growth has recovered from the softness in early July, with nearly a point of new prescription market share growth since July.

Share of new and switch patients, the so-called dynamic share, remains in the mid teens.

Our [detailing share of voice] is highly competitive, and we've just kicked off a new DTT campaign last week.

We're as determined as ever to succeed in this market, and believe that Crestor's profile in a market increasingly recognizing the need for lower LDL will ultimately win through.

The press release updates you on progress in other key markets, including the recent recommendation for approval in Japan.

Oncology sales were strong in the quarter, up 18% to $885m.

Arimidex sales were up 58% in the quarter to $221m, with strong performances in all major markets as a result of increasing usage in early breast cancer.

Iressa sales were $113m in the quarter, and over $300m for the 9 months, with growth in Japan and in the U.S., together with $53m of sales from other markets.

Retail prescriptions for Iressa in the U.S. were up 63% versus the third quarter last year, and 8% higher than the second quarter of 2004.

Finally, Seroquel.

Global sales were up 51% in the quarter to $529m, and 35% for the 9 months to just under $1.5b.

The 59% growth in the U.S. in the third quarter is flattered by de-stocking last year.

The prescription growth remains as steady as ever, with total prescriptions up 31% through September.

And in September, Seroquel overtook Risperadone to become the market leader in share of new prescriptions at 26.4%.

I've just described some of the key products that are driving the top line forward.

The second major theme is the pattern of costs.

We indicated last quarter that R&D and SG&A costs had peaked, and in the third quarter growth in R&D and SG&A costs was 8%, as reported, with just 4% in constant currencies.

This is considerably lower than the 13%, the constant currency growth rate reported at the half year, and reduces the growth rate in these costs to 10% for the 9 months.

This has been achieved by a cost -- by effective cost management across the organization, but not at the cost of being competitive in our key market segments.

For the full year I expect to see these trends continue, with the annual growth rate in these costs dropping further in constant currency terms in the fourth quarter.

Fourth quarter R&D and SG&A will be above the third quarter in absolute terms, however.

Not only because the third quarter tends to be seasonally low, but also because a number of key promotional programs, Crestor BTC, for example, were planned to start in early October, giving quarter 3 a phasing benefit as well.

Third quarter operating margin improved by 1.1 percentage points over the third quarter of last year, to 24%.

Sales mix continues to benefit gross margin, with Merck payments falling to 4.9% this quarter compared to 6.7% in the third quarter of 2003.

Overall, an improved gross margin as well as the R&D and SG&A trend would have benefited operating margin by almost 3 percentage points.

But this was partially offset by an adverse currency impact on margin of around 0.8 percentage points and the Exanta provisions I referred to earlier.

So for the full year we expect to see margins ahead of last year by up to 0.5 percentage point.

Currency movements continue to benefit sales and elevate costs, but to a lesser extent than we've seen in the first 2 quarters.

Currency has benefited earnings per share for the 9 months by around 5 cents.

And in the fourth quarter we expect to see a 2 to 3 cent negative effect, based on currency exchange rates and the fact that hedging gains realized in the fourth quarter of 2003 will not be repeated.

So the outlook for the fourth quarter is essentially a continuation of the same 2 trends I've just described.

Continuing sales growth and a flattening cost profile.

But the outcome will be even more striking in terms of EPS growth, given the weak comparator from 2003.

For the full year we now anticipate earnings per share before exceptional items to be around $2.10 including the Exanta provisions.

This is a better picture than we anticipated at the ABR, but it's based on a stronger cost management performance in the quarter than anticipated.

And indeed, if these trends continue, the outcome could lead us to do even a little better.

Finally, IFRS.

You will have seen that we intend to release on Monday our restated figures for 2003, including all 4 quarters and the first 2 quarters of 2004.

There will be a comprehensive package of information, including a description of the impact of each new accounting standard, and why.

I'm sure there will be plenty for you to digest and accordingly we will arrange for a conference call on Monday, to give you the opportunity to go through the details more comprehensively.

And with that, I'll now hand you back to the operator to begin the question and answer session.

Thank you. [OPERATOR INSTRUCTIONS].

We will take our first question from Jo Walton of Lehman Brothers.

Please go ahead.

Good afternoon.

Could you tell us which line in the P&L the Exanta write-off is in?

And could you tell us a little bit more about the dynamics of the PPI market?

Wyeth yesterday were giving us gross sales and net sales, talking about very heavy levels of discounting.

If demand is up 17%, what sort of run rate should we be seeing in value as opposed to volume?

And I wonder if you could also tell us when you think Crestor will move into profitability, given the high levels of DTC that you're clearly expending against it.

Okay, thanks Jo.

Exanta write-off was in the -- all of it was in the cost of goods lines.

Thank you.

Because essentially it was inventories.

In PPI, as you say, we've seen a 17% growth in tablets.

I can say that the price impact is pretty negligible.

So we're not seeing any erosion of that in underlying volume terms, and that's because of the nature of the contracts that we've got.

Protonix is in a different segment, it goes for the very price-competitive segments.

We have, as we explained at the ABR, a very highly concentrated portfolio of contracts, which are essentially designed to be win-win.

The more market share that it's driven, the higher level of discounts, and they don't undermine the underlying volumes.

So I think we're in a different part of the market to Protonix.

On Crestor, I think you won't be surprised to learn that we're not going to give a profitability forecast on Crestor.

And we're continuing to manage the right level of investment that we need including, as you say, DTC.

But I think when you say high levels of DTC, you may be exaggerating the consequences.

I think we have a very disciplined mix equation and if DTC comes into it, then other aspects may be toned down.

So we're still managing Crestor within the envelope of expected costs that we had at the beginning of the year.

Thank you.

Next question please.

Moving to Goldman Sachs, we will take our next question from John Murphy.

Yes, good afternoon.

A couple of things, John.

Firstly, in terms of SG&A you've given us some guidance for this year, certainly.

But we're just hoping you might be able to help talk us through what are some of the key issues determining that on an ongoing basis, because obviously we had a very good quarter in terms of that cost control and I guess all of us are trying to really figure out going forward how sustainable that sort of control is.

And second, just talking about pricing pressure kind of growing out of it [from] Nexium.

Are you seeing much pricing pressure in the U.S. from managed care?

And could you maybe in terms of the sales results you saw in the third quarter tell us what the pricing benefit or pricing component was within that, please?

Yes, okay.

Yes, on the sustainability of SG&A costs, I think 1 of the things that I was trying to point out was that we were probably in the third quarter a little below what I would have called the normal sustainable rate, because of seasonal factors and the lower levels of activity that you tend to see in Europe in July and August.

It does affect costs.

And secondly, there was a little bit of phasing from some programs that were originally anticipated in the tail end of the third quarter, starting at the beginning of the fourth, such that you will see a higher level of SG&A in quarter 4 than you did quarter 3.

That said, I believe that our mechanisms to manage these costs more effectively are getting better each quarter, and we're placing much more deliberate investments with a clearer idea of the kind of returns that we want from them than we have done ever before.

And this is giving us more confidence in being able to look at costs currently and project them forward, such that you will see the annual run rate, which was 10% at the third quarter, come down a few more points in the fourth quarter.

I think I'd also make the point that we will going forward still want to make investments and we clearly recognize that productivity is important but you can't sustain the business long term on productivity improvements.

You still have to make investments in products and R&D projects.

And we'll still do that, but I think we're getting much better at placing our money now where it really counts.

So don't extrapolate from Q3, but I think when you've got -- when you look at Q2, Q3, Q4, I think that will give you a better idea of how we're managing these costs.

They've undoubtedly peaked.

On managed care, I think we've talked about this, our philosophy on it extensively.

It has been to get the right accounts, to make sure that we do -- that we are listed on those [formularies] that really have large volumes of patients behind them, and really work them effectively and get the market shares for these key accounts well up above national market shares.

Because that's what ultimately will pull more benefit for their patients, because they will access higher levels of rebates but will also pay for us as well because we get higher market share and higher volumes.

I think the overall price volume effect for the quarter in the U.S. was pretty close to -- for the 9 months and the quarter it was a small positive.

So I think this philosophy of really focusing on managed care accounts means that you can offer rebates without seeing erosion of price.

And I think we feel pretty comfortable with those contracts, albeit within an environment that is undoubtedly of increasing price pressure, as Tom described very clearly to you at the annual business review.

Okay.

Thanks very much.

Okay.

Thanks John.

Next question, please.

Moving to Morgan Stanley, we will take our next question from Andrew Baum.

Hi. 3 questions, if I may.

First, could you give us an update on - as much as you can - on the French and U.S. discussions that you're having regarding Exanta?

And also how the, let's say, delay in Exanta's launch in the U.S. is going to impact SG&A spend and margins for next year.

Second, I know you don't want to give us guidance for '05, but perhaps you could talk to the pattern of cumulative SG&A and R&D spend, and maybe a quick word about whether the phasing pattern in the quarters is going to be similar.

And then finally, Germany and Crestor, any update there?

Okay.

Mike, perhaps you can pick up Crestor in Germany, but there's really not much to add on the status of Exanta.

Obviously, we should all recognize that the product is on the market.

We are selling it in Europe in the short-term indications and we are in active discussions at the relatively late stages of regulatory approval in France.

And the arguments that we are taking to them are the arguments that we've explored with you on many, many occasions, that the benefit outweighs the risk and it's just a case of making sure that everybody is comfortable about the mechanisms that are put in place to manage the risk.

Discussions are ongoing with the U.S., but they have reached no definitive point and it's unlikely, I think, that there'll be a quick resolution on that.

Hence the provision that we've made against the U.S. inventories.

I think the consequences of delay shouldn't have much impact really on our SG&A.

We recognized that the advisory committee was a pretty pivotal event for Exanta, and therefore had deliberately held back many of the normal investments that we would have made within -- for a product that could have hit the market 3 or 4 months after an advisory committee, including some key manufacturing decisions.

So I think we had minimized the impact of a delay or a non-launch of Exanta, such that it won't really have any short-term impact.

And of course the impact, had it been launched in '04 or '05, would have been negative for the same reasons [of all the] questioning Crestor, because it would have carried a net investment.

So we don't see that there's any impact on Exanta, and obviously --

I guess I was trying to [say] is there any upside, given the fact you haven't got the marketing costs now.

Well, the money that we've earmarked -- we'd have earmarked for Exanta either is reinvested for return or is available for the bottom line.

On 2005, I don't really want to be drawn into where we'll be, but I think the kind of shape of the business that you're seeing in 2000 and -- in the third quarter will run into the fourth quarter as well, and this is not a phenomenon that we would expect to see stopping in the first quarter of 2005.

And clearly our aim is to run the business in this kind of form, as we have previously done so -- as we have previously suggested.

Hopefully, the patterns will become more predictable.

The inventory management arrangements should lead to quarterly sales that are closer to underlying demand.

I would just make 1 proviso on that, just so you think that the inventory management agreements are so sort of perfectly structured that we can never have excess inventory.

You can still get excess inventory under these arrangements, but the limits of those excess inventories are significantly lower than we've seen before and they will unwind much faster.

But that said, the quarterly sales pattern ought to be more predictable and I think you're starting to see the shape of investment as well, with Q3 typically being the lower quarter for the reasons I've outlined.

But we'll come back to that subject, clearly, at the end of January, when we'll talk about our targets for 2005.

But I think you're starting to see the shape of the business emerging as we want it to be.

Crestor in Germany, Andrew, the reality is we don't have anything new to say at this point of time.

Okay.

Thanks John, thanks Mike.

From Smith Barney we will take our next question from Kevin Wilson.

Please go ahead.

Thank you.

John, a question on -- again on Nexium.

Sorry to dwell on this, but looking at last year's third quarter, a U.S. number of 786m.

What is the assumed inventory build in that number now, because clearly it seems more than the 100 or so that I had noted at the time?

And secondly, can you just confirm that the 55 cents excludes any element of tax credit?

Yes.

The 55 cents is exclusive of the $58m on Zoladex and the $219m on Advanta.

Nexium, the inventory build last year in the last third quarter, if I recall it right was 300m, and I think it -- we've said a substantial proportion of that was Nexium.

So the inventory build in last year's Nexium was significantly above 100, in fact it was probably closer to 200, which would give us -- give you around a 250m underlying demand swing.

Could I also just have a follow up?

In terms of mail order for Nexium, it's risen quite significantly, according to my maths anyway, over the last year, to about 15% of TRX.

Do you see that stabilizing or continuing to grow?

I think that -- I think it will continue to grow in line with general shifts in the structure of the U.S. prescription market.

I think mail order as a segment continues to gain some momentum, and as PPI is a large part of that, if it does grow then I think we'll see a bigger share because we're well placed amongst the main mail order houses.

Thanks very much.

Can we have the next question please?

From ING Financial Markets, we have a question from Max Herrmann.

Good afternoon.

Just a quick question on Losec, obviously is a tail-end product now.

Can you give us a bit more of an idea what's been happening with regards to markets such as France and what's the generic erosion we can expect going forward?

Where particular timings of generic competition will come in and impact the decline of the product?

Thanks.

It is, as you say, now in its -- very much in its tail end, although in the U.S. we still have continued supply of the 40 milligram.

I think in France we've seen a pretty rapid erosion.

In fact I think in some senses the Losec erosion in France has exceeded that which we've seen for some products in the U.S.

So it's clear that other markets are now cottoning on to those transfers, and I think we've seen our U.S. -- sorry, our French Losec business decline by about a half in volume terms in the quarter.

I think the next -- I don't think there's any other imminent Losec erosion.

I think Italy is still under patent until 2010, so a few years to come.

So I think unless I'm missing a market, I don't think there's a major 1 for a year or 2.

John, it might be worth adding that in Japan we've had generic competition since July, and the penetration is less than half a percent.

And actually, I'm sorry, I've also missed 1 that's also in the press release, is the situation in Canada.

We'll see Losec competition in Canada probably from the tail end of this year.

Thank you.

I think we got there in the end for you Max.

Thanks.

Our next question comes from Mark Purcell of Deutsche Bank.

Thanks very much.

Just 3 quick questions.

Firstly, on the Japan Tobacco JTT-705 CETP inhibitor.

I just wondered if you could let us know whether that was a product you looked at and if you did, what led you to basically discount it as an option to combine with Crestor?

Secondly, on Seroquel.

Clearly volume growth is very strong.

I just wondered if you're beginning to see some of the increase in the average length of therapy following the label change, the 3 to 12 week label change on bipolar, and whether you'll continue to see product mix from the bipolar rollout as well.

And then lastly, following your guidance, second half EBIT margin's going to be around about 24, just over 24%.

Clearly your phase III program's going to start next year on oncology, 0865, possibly 6140 as well.

Those are the sort of negative pressures, the positive pressures clearly continued strong expansion of the growth products.

Would you expect '05 to be meaningfully above the 24% EBIT margin in the second half of '04?

Well, I'll ask my colleagues to think of an answer to the Japan Tobacco question, because that's not 1 I've got at my fingertips.

But let me cover Seroquel, and clearly the product is -- continues to do phenomenally well in the U.S.

The mix issue and the dosage issue is something that we have been looking at quite deeply, because as you rightly say, the dosages for mania are pretty high and therefore you would expect to see an increase in value.

In actual fact, when you actually look at it, when you look at a schizophrenia patient and look at the average dosage and the number of days' treatment, and then look at a mania patient and look at the dosage and the number of day's treatment, you'll actually see that there's less treatment days involved.

Such that, if you like, the annual profitability or the annual prescrip -- or the annual dose intake of the schizophrenia patient looks to be at the moment ahead of bipolar.

So although you think on the surface that there's a mix effect, it's actually a little bit more complex than that and of course there is also a pricing differential between 600, 300 milligram and 100 milligram tablets.

So although your overall thesis is right, Mark, I think in practice it's not working out quite as clearly as that because the mania patient's on therapy for less days than a schizophrenia patient.

Are you seeing that increasing, John?

Well, I'm not sure I'm seeing it increasing, because we're only really building the database.

But it's not significant, but it is there and it may well be that over time the patient days on mania increases.

But for now, you've got a slight negative effect from the doses compared to what you would have naturally thought it to have been.

On margins, it's -- I would expect to see margin increase next year but I'm not going to put a modest or a significant to it.

You'll have to wait for that until the end of January.

Any ideas on Japan Tobacco?

Yes, let me make a quick comment, John.

Mark, I think we've talked about this before but it's an interesting concept, CETP inhibition, and I think we feel the jury is perhaps still out as to whether the long-term benefits might be the same or different from those of statin.

But it's certainly an area that's of interest, but I don't think even you would expect us to tell you or speculate about what licensing discussions we've been having.

Okay, thanks very much.

Okay, thanks.

Next question please.

From Bernstein Asset Management we will take our next question from [Michael Castor].

Thanks.

Can you elaborate a little bit on the control of [spend] that you've seen, specifically?

Are you decreasing the number of sales reps that you have in total?

Is there same way to increase the efficiency?

I've heard that the sales reps have often left with a [minimalist] position. [Inaudible] you can give.

I missed the very first part of it.

What was the first part of the question?

The --

Were you talking about Crestor or generally?

Just in general.

You've been very effective at controlling costs and this is a trend that I'm seeing across [indiscernible].

Okay, yes.

No, I think it's -- it certainly does come from much more discipline, and I think much more effective execution within the sales force.

So I think the sales leadership in the U.S. have done an outstanding job over the last couple of years, by really concentrating on 1 metric after the other.

Starting with number of days out in the field, making sure that the reps are fully equipped with all the technology to mean that they are out in the field more days than they're in doing admin, to then find ways to get the average daily number of details up from low levels to higher levels and then ultimately to find ways to improve the quality of the interaction with the physician.

And we think that over the last 12 months we've got something like 30% more details out of the same sales force, such that we can accommodate the opportunities that we have in the product portfolio in the U.S. without adding to our reps.

And I think there are still further efficiencies and productivity gains that we can make by further looking at activities and so on, and what it needs to be to be more effective as well as at a more macro level.

And that's making sure that we've got the right mix of resource to managed care, the right mix of investment in bringing the consumer in through DTC and other patient programs, and then finally to the physician.

And this is something that we're not just doing in the U.S., this is something now that is being done throughout the world, in all of our markets, with actually the same effect.

We've done some excellent work elsewhere.

So when we talk about productivity, there are some real opportunities to drive what we've got more effectively to get more value out of the things that we do today rather than, I guess, what we would have done a few years ago would have been adding more cost to the base.

So I think we've done a tremendous job so far, but -- and we are certainly not short of ideas as to what to do next.

The more we look into this, the more opportunities for the next level of productivity gains are there.

And I certainly won't go into any more detail in those, because I think there's some real competitive advantage to be gained.

Thank you.

Next question please.

From Bear Stearns we will take our next question from Alexandra Hauber.

Good afternoon.

Alexandra Hauber from Bear Stearns. 2 questions.

First, in the second quarter a lot of your core growth drivers had very strong performance internationally, and if I look at those products in the third quarter now, a number of them are down.

The respiratory products are fairly seasonal, but could you elaborate on whether there's anything specific on Seloken, Atacand, Faslodex, and even stronger growing products like Seroquel and Crestor have not done anywhere near as strong as they did in the second quarter.

So I'm just wondering what specific one-off effect has caused this erratic sales trend.

And then a second question on OTC Prilosec.

Can you just confirm that the profit is actually booked under other operating income?

And looking at that figure in the third quarter, other operating income, am I right in assuming that the majority of that figure is actually that profit split?

Well, I'll deal with the OTC Prilosec.

The simple answer to your question is no, it's not OTC Prilosec.

In fact, the benefits that we gain from OTC Prilosec, I think we've always said has been relatively modest.

And it largely doesn't come in the other income line because much of it is the contract manufacturing, which is up in costs of goods.

But what's in other income is really a mix of some recurring, some non-recurring, and I guess half of it was the sale of part of an equity portfolio that we've had for many, many years.

In terms of the rest of the world, when you say well, what one-off effect was it, you do -- we do generally see higher levels of sales outside the U.S. in quarters 4 and quarters 1.

And the lower level of activity in Europe does percolate throughout the whole system in terms of -- it's not just our vacations but it's the vacations of our customers and so on.

So Q3 typically is a weaker quarter, and I don't think there's anything that I've certainly got at my fingertips that would say to you "and there was some specific factors on Casodex, Atacand" and so on.

Mike, is there anything you could add to that?

No, I think that's absolutely right John, and there's nothing specific.

I think Alex said -- mentioned the respiratory products, and that's clearly a seasonal effect, but nothing beyond that.

So the fact that we have never seen this in any of the other products in the past is either because they have been growing even stronger in the previous 2 years or because of the currency swing?

What's supporting the sales trend?

Yes, well there may be some currency in there but I think it's always been there.

Okay.

We'll have a look into that, I'll see if I can satisfy my curiosity now as well.

Thank you.

We will take our next question from [Francois Smith] of Exane BNP Paribas.

Please go ahead.

Yes, hello, good afternoon. 3 questions, please.

First is do you expect the rate of Merck payments to go up in the fourth quarter?

Merck just mentioned in their press release they expected payments in the range of 1.4 to 1.6.

Second, could you please remind us what are the -- what is the [size] of your net sales of Losec in the French market?

And finally, what is the sort of total European market share of new prescriptions of Seroquel at present?

Thank you.

Could someone look up -- if somebody looks up Seroquel.

The rate of Merck payments, I think as we've discussed endlessly in the past, that the reconciliation between Merck and ourselves is not perfect.

But I think we would expect to see Merck payments as a percentage of sales would be around the level that we've seen this quarter and last, which is around the 5% mark.

But of course, when you look at that in absolute dollars if they're forecasting higher sales then you can still get a bigger number based on a constant percentage.

But that's how we would see it.

The French sales of Losec in the quarter are about $60m.

And Symbicort - Mike?

Seroquel.

I'm sorry, Seroquel.

Yes, I don't have a specific figure, John, but what I think we can say is that there's a very significant increase in the growth of the use of atypicals in Europe.

There's a lot more headroom to go.

Whereas in the U.S. the older drugs have more or less gone.

There's still a lot of use of [Alvil] etc.

And I think we're sure that Seroquel is at the front edge of that and is leading that growth.

Hang on John, I have some numbers.

No, we can't go further than that.

The ABR presentation from Geoff Birkett, I have a slide or 2 that show the market share progression on Seroquel in some of the European markets, which might be helpful.

I would direct the caller to that information.

But certainly Seroquel is doing extremely well in Europe.

Okay.

Can we have the next question please.

We will take our next question from Chris Spooner of JP Morgan.

Yes, good afternoon gents.

A couple of questions, please, on the margin again.

Firstly, John, of the 3 percentage points of underlying margin improvement we've seen, how much of that would you attribute to the change in the Merck [payaways]?

And secondly, I guess I'm quite surprised, in a way, that in the past year or so you've -- because of currency movements the margin has been hit by the best part of a percentage point.

And yet you haven't downgraded your 27% margin guidance, which must infer that you believe margins are doing better than perhaps you'd expected.

If that is the case, what is it specifically that's doing well?

Okay.

The Merck effect, I think the Merck component was 4.8% in quarter 3.

4.9% against 6.7%.

Okay.

So it's a 1.8%.

I definitely agree with 6.7%. 4.8%, 4.9%, 6.7%, so that's the direct effect.

I don't quite know how to answer your second question, because it -- I'm not sure I really want to admit a lack of sophistication in my forward margin modeling that can take alternative currency scenarios into account.

But I think currencies do tend to swing and we believe it's achievable from where we are.

Sure, but the currency has moved against you since you gave that target, which either means the target wouldn't be achieved, or -- but you haven't moved it, so presumably things are looking better.

Is that not the case?

We're targeting 27% from today.

That probably answers the question.

Okay.

All right, thanks.

Moving to HSBC, we will take our next question from Martin Hall.

Please go ahead.

Thank you John.

We've seen an enormous drop in the operating margin in the United States over the last 2 years, and this has been largely compensated by a big increase in the European margin.

Can you tell us how you're positioned today of those 2 margins, 1 versus the other, especially given the apparent slowdown in the European sales growth that we've seen in the third quarter?

The U.S. margin is -- has obviously been affected by the generic erosion.

I think the underlying profitability of the U.S. and Europe is closer than many people think, particularly when you take account of the payments to Merck.

But I don't think we are seeing any real -- we're not forecasting our business nor really taking any actions in the belief that we're seeing dramatic shifts in profitability.

That said, some of the things that we're seeing in Germany, if you take a 16% price cut, we've got to move pretty fast to negate that.

So I'd say the European margin's probably more difficult going forward than the U.S.

I'm not sure I'm answering your question very well because I'm not sure that there is a really good clear, crisp answer to it without trying to unpick what we actually see in each of the markets, and I would prefer not to do that.

Okay.

I suppose what I'm really getting at is when do we see the U.S. margin coming back much closer to a par with the European margin?

Even adding back in the Merck payments in 2003, you're still quite a long way behind.

Yes, well you see I don't think you necessarily see the same underlying profits in the U.S. that we do, because obviously we put -- there are transfer pricing things in -- adjustments in there, which affect profits in the territory that we really look through and get to the underlying profitability in each market.

So I think -- clearly the U.S. has been affected by patent erosion and the investments, and a significant amount of the international investment has gone in the U.S.

So clearly, as we see the top line accelerating against a flatter cost base, I think proportionally more of that benefit will go into the U.S.

That might be a little bit more clearer but I think -- If I was you I'd be slightly cautious about it because you don't really see what's the underlying market profitability in the same way as we do, because of the overlay of legal entity structures.

Okay.

Thank you.

I think we're onto the last question now.

Thank you.

We will take our next question from Ben Yeoh of ABN Amro.

Good afternoon, it's Ben Yeoh at ABN Amro.

Just 2 quick things.

I was wondering whether there was any update on the latest subpoenas that you've got in terms of marketing practices.

I know -- I think you've got someone from the Pennsylvania U.S.

Attorney's Office, and there's 1 ongoing in the Boston office.

It's probably going to be too early to say, but could there be any fines or something coming out of that, and what exactly are those investigations about?

And the second 1 is on Crestor in Japan.

Has there been any change to the structure of the deal for that and how is it working?

Would you expect much of an uplift going into '05 from a Japanese launch?

Subpoenas.

We rigorously update our contingencies each quarter now in the press release, and there's a full page of what we regard as being the significant changes in the quarter.

And I don't think there's very much of an update on those investigations.

I think you might -- there's a paragraph at the bottom of page 14, which I think really doesn't add a significant amount of new information other than just confirming that we've had the subpoena in Boston and so on.

But I think it takes quite some time before it really becomes clear what the nature of those cases are.

So I would look to those updates going forward as giving the best position that we think we're in, or the position that we think we're in.

But you wouldn't have taken any provisions for anything yet?

No.

Too early?

No.

No.

On Crestor in Japan, there's been no change of the -- in the structure of the deal and certainly not in the last 12 months.

And I think we're all looking with Shionogi forward to getting onto the market early next year.

Okay.

Thank you.

Okay.

Are there any more questions?

We have a question from [Larry Beagleson] of Prudential Financial.

And I think we'll make this the last 1.

Hi.

Thanks for taking the call.

This is Larry Beagleson for Tim Anderson from Prudential. 2 quick questions.

First, had Exanta launched in the U.S. on time, I'm wondering what franchises the reps would have come from.

In other words, we're trying to figure out where you have extra marketing muscle now that Exanta's delayed in the U.S., and are you likely to keep this extra capacity.

And the second question is when will the ISEL study for Iressa be un-blinded?

Thanks.

Mike, if you take the second 1.

I think on Exanta sales, as I said to you before, we were largely holding back on making the key allocations of resources to Exanta pending the outcome of the advisory committee and were really looking for the allocation to largely being -- coming out of the productivity improvements.

So I wouldn't think that there was -- don't think that there was a substantial sales force sitting there waiting for Exanta to come.

It wasn't there.

The capacity was, is and will be fully utilized going forward.

On the second question, Mike, on Iressa?

First quarter 2005.

Thank you.

Okay, well I think that's the last question and I'd just like to finally thank everybody for joining the call and your questions.

As ever, if there is anybody that we've missed off or anybody with follow-up questions, by all means contact Investor Relations.

Thank you very much indeed and good afternoon.

Ladies and gentlemen, that will conclude today's conference call.

Thank you for your participation.