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Sir Tom McKillop - Chief Executive
Good afternoon, ladies and gentlemen and welcome to AstraZeneca's annual results presentation. 2004 was quite a year for AstraZeneca.
And today I'm joined by John Patterson, our newly appointed Executive Director for Development and Jon Symonds, Chief Financial Officer to discuss last year's performance and how we are approaching the period ahead.
First, the headline results.
And by any measure these were strong.
Sales of $24.1 billion were up 14% as reported and 9% in constant currency.
Operating profit increased by 15% in constant currency.
And earnings per share before exceptional items were $2.11, up 18% from last year.
The board has recommended increasing the dividend by 18%, bringing the total for the year to $0.94.
In addition, the company used its excellent cash flow to repurchase just over $2.2 billion worth of our shares, nearly double the level of 2003.
The fourth quarter was very strong with sales up 16% and operating profit up 68% in constant currency.
After significant investments in both R&D and sales and marketing, we are now seeing the benefits of our product (inaudible) benefits feeding through to the bottom line.
Jon Symonds will take you through the details and the implications on future performance a bit later.
Strong sales performances were seen across the whole portfolio with mid to high teens growth from our cardiovascular, oncology and neuroscience products and with respiratory up 8%.
In GI, sales were down 4%.
But that figure masked the 15% growth in Nexium to $3.9 billion.
Very good, but not quite enough to make up for the 50% decline in Losec.
The growth portfolio once again drove the top line summing in another outstanding performance with sales reaching 11.2 billion, up 30%.
And these products now comprise 52% of total company sales compared with 44% a year ago.
But financial results alone don't provide a fair assessment of the year.
Shareholders in AstraZeneca had a tough year with the share price declining 50%, in part due through a sector derating, but also in response to the disappointments with Exanta and Iressa.
And the difficult market conditions for Crestor.
Within the company we are determined to arrest this decline, rebuild confidence and restore shareholder value.
Let's look at what happened in 2004 in a bit more detail.
Here are the priorities I set out last year.
And I'll use this as a framework for my review.
We forecast earnings per share in the range of $2 to $2.15.
And as you've seen the result was $2.11, placing us towards the top of the range.
However, if we offset the $250 million of provisions made for Exanta and Iressa, the result would have been well beyond the top of the range, demonstrating just how quickly and significantly the productivity improvements are feeding through to the financial results.
Success with Crestor was a top priority and here the outcome is mixed.
Crestor has been approved in 67 countries, launched in 56 and achieved sales in 2004 of $908 million.
Not bad.
But not as good as we had hoped.
Outside the U.S. we are tracking supply.
Double digit market shares have been achieved in a number of countries including the Netherlands and Canada.
And more recently, good progress has been achieved in just 8 months on the market in France and Italy.
In the U.S.
Crestor got off to an excellent start winning over 6% of new prescription market share by March.
And was on a steady upward trajectory.
We had made a strong current detailing from competitors.
But that was expected and we were coping well.
Since then, however we have been hit with a series of accusations concerning the product safety.
Accusations, which we consider totally unfounded.
In spring, it took us around 6 weeks to recover market share momentum by communicating the actual safety data to prescribers.
Further episodes followed the same pattern.
But with inflection tending to be deeper and the recover taking a bit longer.
Particularly as patients themselves became aware of the accusations from widespread media coverage.
The latest episode in the wake of the Senate's Vioxx hearings had an even greater impact on those prescription trends.
And that was made worse by the effect of the holiday periods.
But we are determined to restore Crestor's market share growth this time, just as it has done previously.
Because it's an excellent product and in the end good science should prevail.
Here are the facts about Crestor's safety.
U.S approval came Baycol withdrawal and was based on the largest pre registration database of any statin, including direct head to head comparisons with already marketed statins, in double blend clinical trials.
Trials, which showed essentially no difference in the incidence and pattern of adverse events.
This safety profile has been confirmed in the ongoing clinical trial, involving more then 40,000 patients, including the extensive Dallas (ph) State program again involving direct head to head comparisons.
More then 4 million patients have been treated with over 16 million prescriptions, rigorous post marketing surveillance of this experience, is also consistent with a safety profile in line with other marketed statins.
Despite this, the misrepresentation continued.
Most recently, concerning the report of a death from Crestor.
Companies may receive such reports on any product, and they are all followed up diligently.
This is the third such report we have received on Crestor, and just like in the 2 previous cases, this death is not due to Rhadomyolysis.
And the treating physician has now concluded that its highly unlikely Crestor played any part whatsoever in the death.
In fact, today we have no Rhadomyolysis debt associated with Crestor, which in itself is quite interesting.
Since occasional deaths have been reported, I'd associate it with competitor's statins.
So we remain completely confident in the safety profile for Crestor.
We are totally transformed in our reporting, including the provision of a website with the data available to anyone.
Soon, we'll also begin receiving the results of a series of rigorously designed pharmaco-epidemiological studies, evaluating the adverse event profiles of Crestor, and the other company marketed statins.
These results should provide valuable further safety comparison among the statins.
Crestor certainly faced challenges in 2004.
But our confidence is undiminished.
We know it has unparalleled efficacy, and brings real clinical benefits to patients.
With the new guidelines setting even more demanding cholesterol targets, Crestor is the right product at the right time.
And we are determined it will win its rightful share of the worldwide statin markets.
Our next priority was to drive the oncology portfolio.
And here again, we have some excellent programs and some disappointment.
The use of oncology products was nearly 3.4 billion, an increase of 16%.
Casodex sales were up 11%, topping $1 billion for the first time.
Outside the US, where registrations are being secured for Casodex mono-therapy, in the treatment of early prostate cancer, sales were up 18%.
Faslodex sales were up 28%, just short of $100 million, aided by the first launches in Europe.
The star performer however was Arimidex.
Sales increased by 48% to $811 million, as Arimidex establishes itself as the new standard of care for post menopausal women with breast cancer.
As you can see here, it's by far the market leader among our aromatize inhibitors.
And market leadership will be very important in this class of drug.
It's clear that the aromatize inhibitors are highly effective, and will displace Dymoxifen as the preferred treatment providing us tremendous opportunity for growth.
There's strong competition, but we believe we will continue to lead the market for the following reasons.
Arimidex is the only aromatize inhibitor currently approved for primary adjuvant treatment in early breast cancer.
Arimidex is the only product with 5 years safety and efficacy follow-up data.
The annual and DBCSG studies give us good switching data.
In the US, Arimidex is winning more then half of all new patients.
So over time, switching will become less important.
And we will continue to be ahead of our competitors in exploring new clinical settings, such as prevention.
This is a class with strong growth ahead, and we certainly expect Arimidex to win a very good share of that growth.
Now to Iressa and the disappointing ISEL study.
Iressa was having a great year, with full sales of $389 million, $179 million of which were in the USA and the $171 million in Asia.
Then in mid-December we received the preliminary analysis of the ISEL trial comparing survival and advanced lung cancer between Iressa and placebo.
We saw the same response rates as in previous trials.
And there was a trend in favor of increased survival with Iressa.
But it failed to reach statistical significance.
Prospective sub-group analysis did show a statistically significant benefit for patients of East Asian origin, and the non-smokers and further analysis are ongoing.
John Patterson will talk a little more about this later.
But what are the, the likely commercial consequences?
We have, of course, communicated the results to the relevant regulatory authority, and discussions are underway.
Today the responses have been very measured, with recognition that individual patients do get significant benefit from the product.
Sales are continuing in approved markets, but we have voluntarily suspended active promotion in the US while the true analysis of the ISEL study is completed and the implications assessed.
We have a lot more to learn about Iressa and the story is definitely not finished.
While commercial prospects have certainly reduced in western markets, the positive results in patients of East Asian origin do offer the prospect of a continuing successful business in those important markets.
Next on our priority list was to progress the US market leadership for Nexium and Seroquel.
Without doubt we've made significant programs in both of these important products.
Nexium sales were $3.9 billion for the full year, up 15%.
US sales were over $2.7 billion, other markets $1.17 billion.
But in those other markets we registered almost 30% growth.
In the US, Nexium has already won market leadership with gastroentorologists and we made steady progress in the total market ending the year with a 27.1% share of total prescription.
We're closing in on Prevacid, and look forward to overtaking them in the coming months.
A great deal has been written about the market dynamics in the PPI trials, demonstrating as it does the dual impact of the introduction of generic and Prevacid OTC, and we monitor this very closely indeed.
You can see from this quarterly data that the fourth quarter was a good one, with further progress and volume growth for the branded PPIs, and in particular Nexium.
Total tablet growth has been maintained in the high teens, and it will be interesting to see how the next few quarters play out, since there has been some speculation the product shortage may have limited the full impact of Prevacid OTC.
In some senses however, there are two battles under way.
One involves Prevacid OTC generic omeprazoles, and maybe some low price branded products.
The other is among the branded prescription product.
And we are confident, we are winning this second battle through the clinical differentiation we've established for Nexium.
We also see a potential upside coming from the subulan(ph) in the anti-inflammatory analgesia market.
This presents us with a significant opportunity for Nexium, full prescription for GI protection.
As you know, we recently received approval for Nexium, in reducing the risk of gastric ulcers for patients, in continuous therapy with NCs.
So we are very well placed.
Coming to Seroquel.
It was really good to see us go through this $2 billion bracket in annual sales, up 33% and fueled by strong launches for the bipolar mania indication.
As you can see from this familiar chart, we know we've now overtaken (inaudible) in the USA to lead the market in new prescription share, ending the year with 27.5%, 4.6, market share points up, compared to December 2003.
We're also seeing good performances outside the US.
Sales were up 56% for the full year.
In many markets, Seroquel sales growth is well ahead of the atypical market as a whole.
Indeed it's fair to say Seroquel is driving market expansion, and of course there's still considerable scope for atypical growth in these markets.
Next on our priorities were first launches for Exanta and the registration of the chronic planes.
This has been the greatest disappointment of the year.
We obtained registration in Europe for short-term use in preventing thromboembolism in orthopedic surgery.
And we've launched in this indication in 10 markets.
But the major objective was atrial fibrillation and other chronic usage.
We failed to win approval in the US and just last week we were notified that the French regulatory authority would require more clinical data before considering approval for atrial fibrillation.
And that one trial will not be enough in venous thrombo embolism.
We must now determine with the regulatory authorities if there is any realistic way forward with Exanta to determine if its free of the liver effects.
We believe they are less serious than the authorities.
We also of course have AZD-0837 in clinical trial.
And during the course of this year it should become clear whether that demonstrates liver enzyme elevations.
Clearly that was the main factor influencing regulatory authorities.
Progressing our pipeline was also a key priority.
And while Exanta and Iressa undoubtedly weigh heavily, the rest of the portfolio has moved forward.
Jon Patterson will provide a brief update from the physician described the annual business review in October.
For the several years now, I've been saying that as well as requiring new product, winning pharmaceutical companies will need to show continuous productivity improvements and that we have set about doing just fine in AstraZeneca.
Today's results are already showing the fruit from this effort.
But I will leave it to Jon Symonds to talk in more detail about our plans, going forward.
Those were our priorities for 2004.
Overall, how did we do against them?
The numbers are good and there's lots of progress to report.
But events around Exanta, Iressa and to some extent, Crestor have certainly dented the market's confidence as is evident from the share price decline.
We realize this and we know that we have to perform well going forward, if we have restore the utmost confidence.
So what are we focused on?
Our objectives are unchanged.
We want to deliver sustainable top tier financial performance for our shareholders, through the provision of quality medicines.
Of course, we recognize that it's been made somewhat more difficult with the events of the second half of last year.
Over the next 3 years however, we can still deliver very good earnings growth from the combination of sales growth and productivity improvement.
And you'll hear more about how from Jon Symonds.
The strong early to mid-stage development pipeline is also increasingly promising for the long-term.
So our main challenge is bringing all this together in the mid-term.
All sources of potential growth will be pursued including getting more from the life cycle management of our portfolio, bringing through the Phase 2 and Phase 3 project, emerging market opportunities and value enhancing product acquisition.
The work is already underway.
The development function has a big part to play in all of this and the appointment of John Patterson with his extensive experience was a further step towards getting it right.
Although only in the role for few weeks, I will now hand over to Jon to share with you his first impressions of the task ahead.
Jon?
John Patterson - Executive Director, Development
Thank you, Tom.
And good afternoon, ladies and gentlemen.
I'm pleased to have this opportunity to present to you at this early stage in my new role.
The key challenges for AstraZeneca, which are the same ones faced by every research-based pharmaceutical company are to increase our research productivity and to then, in an efficient and effective manner, develop medicines into molecules, or even molecules into medicines.
I'm under no illusion that this 10-year process can be dramatically improved overnight.
But we must learn from our recent experiences, so that going forward, especially with breakthrough products, we are a more effective organization.
Some of the lessons that I believe can be learned from recent events are listed on this slide.
And I intend that we will apply them to products in all phases and stages of our development pipeline, leading to an improved ability for AstraZeneca to turn projects into registered and marketed products.
In particular, recognition of risk associated with molecules that are acting through novel mechanisms, sharing those risks with regulators and opinion leaders coupled with good science to understand and mitigate the findings would be key to our future success in the more demanding outside world.
It's the approval and the approval date, not the speed to submission that really matters.
My first priority has been to conduct an ongoing in-depth review of the key development projects as well as opening up a greater dialogue with regulators.
To that end, I have meetings with the FDA and Sico (ph) in Japan in my diary already.
Since the beginning of this month, we've instituted new clinical and regulatory organizations.
And I now plan to use these changes to drive for faster delivery and better decision-making across the whole development organization.
Let me now turn to our development priorities for 2005.
It should be taken for granted that we will continue to take steps to increase our productivity through the introduction of various efficiency and effectiveness measures and that these activities will be focused on delivering the product portfolio.
We will progress the Phase 3 packages of our two innovative, exciting but high risk MCEs for the previously agreed and shared timelines over the course of the year.
The Cerovive Phase 1 result will become available later this year and will give us the first real insight as to whether the activity shown in preclinical models, is translating into benefits for man.
The longer-term portfolio comprises those products that are in development but have not yet reached proof of concept in man.
Our early pipeline is looking much stronger.
And moving forward we would expect to see the fruits of our Abgenics and CAT collaboration leading to a greater mix of small and large molecules in the pipeline as well as an increasing flow of candidate drugs from other collaborations and internal sources.
Last year, Discovery delivered 18 candidate drugs into the pipeline and nine progressed the first time in man.
A further six achieved positive proof of principle making 40% more projects in the clinic.
This increase in discovery productivity and the ongoing effort to avoid those most likely to fail early has led to a near doubling of the phase 1 and phase 2 projects over the last 3 years.
Many of these projects are highly innovative.
And as they move towards the development for launch page 3 watershed we will certainly be applying the lessons learned from recent projects for those programs.
Let me now deal with a number of short-term development related issues on a product by product basis. "We know Iressa is active; we just have to find out in which patient," are the words of a leading oncologist, not mine.
But words that I strongly support.
We share the emerging Eiffel data with you and are continuing to analyze not only the subgroups, but they're now also committed to performing at the request of the independent data monitoring committee, a further survival analysis with a cutoff point at the end of this month.
At that time with over 200 more deaths, the overall survivals will be mature.
We expect to represent the further Japanese meeting before midyear and of course for Novac, if requested.
In the meantime, important studies Lysine and study 721 continue to recruit and no investigator has withdrawn from the program.
Crestor is a vital component of our portfolio.
We're committed to continuously monitor and to develop its profile.
And to deliver both the galaxy program with these outcomes measures and the emerging cohort based epidemiology studies, which will give us case control data on the real life use of Crestor and other statins. 5 pharmaco epidemiology studies are underway.
And the first of them will start to generate data in the next 3 months.
Lifecycle work is ongoing across the product range.
I want to simply point out today the emphasis that I am placing on Seroquel and Symbicort.
In addition, in the current climate, the Nexium NSAID package also represents a significant business opportunity.
The Seroquel program will focus on delivering the SR (ph), bipolar depression and bipolar maintenance as previously communicated.
We will submit a new Symbicort single inhaler therapy package in Europe later this year with a much stronger clinical trial program.
The FDA have asked us for further chemistry and manufactory controlled data on Symbicort AMDI.
Subject to the outcome of this work and the ensuing FDA dialogue the NDA is still slated for submission around the mid year while we put in place a backup stratagem with a slightly modified device.
Turning now to Exanta.
We need to elucidate the mechanism of the underlying liver changes on Exanta.
While continuing to generate further data on backup compound of 0837 and 6140, the anti-platelet agent, both of which have been developed within the coagulation field.
This work together with a dialogue with key investigators and health authorities will take us through to the second half of the year before we can finalize our anti-coagulant strategy.
I've given you a brief insight into some parts of our portfolio, which we shared in depth with you late last year.
Details of the changes in individual products and projects can be found on the updated development status report on our website or in your handouts.
However, I also realize that you have an expectation of a continuing news flow during the course of the year.
We're sharing with you this outline of the key events as we see them unfolding.
It carries the usual government health warnings and that it is data dependent and in many cases subject to acceptance by independent bodies such as Congresses and journals.
It too is in the packet on the website.
There are many issues in drug development today.
The regulatory hurdles are certainly not getting any lower and the general environment is more risk averse.
Against that background, science and medicines continue to move rapidly and there's certainly no shortage of medical need.
Our early pipeline does give us many genuine opportunities and we must now work to turn the science into business reality.
I am ready for that challenge and confident that with talented within the AstraZeneca R&D organization, we can stand up and be counted on to deliver medicines, that matter to the patients and to give the business and our shareholders the returns for the investments they're making.
And now I would like to hand over to Jon Symonds to give you an in-depth analysis of the financials.
Jon Symonds - CFO
Thank you, John.
And, good afternoon, everyone.
Let me now turn to another of our key priorities over the coming years.
The delivery of strong financial performance.
Over the next few minutes I want to cover 3 topics.
An overview of our financial performance in 2004 and the factors in it that are relevant to 2005 and beyond.
Our thinking behind the 2005 guidance and how our performance may develop over the next 2 or 3 years and what we're doing to improve productivity, to raise confidence in the delivery of this performance and the key priorities that flow from it.
So let's start with a financial scorecard for 2004.
And firstly, earnings per share.
As you can see, we delivered the 18% growth in earnings per share to $2.11, which was towards the upper end of our guidance set a year ago of $2 to $2.15.
Tom has already gone through some of the factors influencing 2004.
But the fact that we delivered on our guidance says much for the resilience of the business as well as our determination to deliver on our financial promises.
So let me get straight into sales and costs.
For sales, we indicated a target of mid-teen growth in reported currency terms and around the double digit mark in constant exchange rates.
We achieved this and we've improving quarterly sales growth trend.
Partly because the U.S., patent expiry drug is getting further and further behind us.
But also, because of the momentum of the growth products, as you can see here.
Firstly, the reported quarterly growth rate with the traditional third quarter dip.
And secondly, the progression of our key growth products which grew by 30% for the year to just over $11 billion.
That's getting on for $3 billion of additional sales value for a group of products that now represent 52% of our total sales.
The second part of the story is the management of our costs.
The target was R&D and SG&A cost growth in the high teens and around a double digit mark in constant exchange rate terms.
As you can see, we did better than this.
With underlying growth some 2% or 3% below our original expectations.
The performance founded on strong management.
But good management is not the only explanation.
It's also a reflection of the investment cycles to support the new product launches that began in the second half of 2003.
Here you can see the investment cycle beginning in the third quarter of 2003 with the launch of Crestor in the US.
And it peaked in the second quarter of 2004, both in terms of growth rates but also in absolute dollars.
And the profile for the last two quarters is clear.
Costs have flattened and the fourth quarter costs were below the admittedly high fourth quarter of 2003.
It's this pattern of sales and cost trend that has given us this profile of profit. 5% below 2003 at the half-year stage.
And a nearly 40% profit growth against the second half of 2003 leading to the 15% operating growth for the year as a whole.
Before coming back to where this trends may take us, let me quickly deal with three other points from 2004.
Firstly, product provisions, where 236 million was charged to cost of sales.
The rest of provision covers both inventory and dedicated assets.
And in the U.S., we've also unwound wholesaler inventories, as future sales patterns are now difficult to predict.
The outcome in the U.S. is very much dependent on the FDA.
But we expect there to be some U.S., sales going forward in addition to those in Japan and Asia.
Secondly, the inventory management agreement now covering 15 wholesalers in the U.S. are beginning to pay off.
For the first time, we were able to report clean U.S., sales in the fourth quarter.
And we exited 2004 with inventory levels a shade below the target.
This does however mean that there are still some distortions in our growth rates, this year as excess wholesaler inventories have been worked out.
As you can see here, for the both the group and U.S. sales.
I've added Nexium in the U.S. to this list also.
And it's a constant source of questioning.
The key point here is that the underlying growth is 20% after adjusting for wholesaler inventory movement is in line with dispensed average volumes.
This implies no negative price impact across 2004.
Although we did see a small negative price variance in the fourth quarter.
And we would expect this trend to continue in 2005 as a result of a conscious decision against some Medicare contracts as well as to incentivize some plans to deliver even more market share growth.
Finally, within exceptional items and in the statement of unrealized gains and losses are the disposal of non-core assets and the outcome of some successful tax settlements.
I wouldn't normally point this out.
But they've generated over $500 million in cash and are relevant in an environment that values cash flow, more highly.
So let me leave you now with the picture of 2004, which I believe is most relevant to the future.
Itslooks like at a rolling fourth quarter moving total of sales and R&D and SG&A costs.
As we start from 2002, you can see the combined effect of patent expiries on the sales line while we continue to invest in the growth products.
Next you can see the investment pickup following the launch of Crestor, while the effects of patent expiries bottomed out in the first quarter 2004.
Finally, you can see the trends reversing.
What comes next is now the key question.
But before addressing this question on our 2005 guidance, I want to make one final point on 2004.
And that's to make the transition from U.K GAAP to International Accounting Standards.
Here is the comparison between the two bases in terms of 2004 and our guidance for 2005.
And you can see that in 2004, there was a $0.10 difference between the two bases.
For 2005, we're suggesting that the $0.05 is the reasonable indicator of the difference going forward, subject of course to fair value adjustments on financial instruments.
Which is something that we all are going to have to get used to.
All my comments, going forward now, will be based on International Accounting Standards to make sure that you're making the right comparisons when looking at the targets and the gross growth rates.
And there's plenty more data on the website to help you with this transition.
Hopefully, I've already given you some color on our thinking from 2005 and beyond.
And our intention to continue the separation that's emerging between the sales and cost trend lines to deliver strong profit growth and margin improvement.
So let's now turn to 2005.
The headline target for 2005 is for earnings per share of 2.35 to 2.50 which against the baseline of $2.01, implies 2005 profit growth between 17% and 24%.
Let me just aggregate it a little bit more.
Firstly, sales.
We're expecting sales growth around mid-single digit mark with currency potentially adding a further 2 or 3 percentage points.
Two things are key to this outcome.
Driving the growth product, which concentrate on Crestor, Nexium, Seroquel, Arimidex and Symbicort.
We expect that these groups of products which grew by 36% in 2004 can continue to grow strongly.
Although clearly, Crestor represents the big swinger.
But given our confidence in the safety profile of Crestor we believe that we can begin to rebuild market share growth.
And this has been factored into our forecast.
On the costs side, the future rest more firmly in our own hands.
Overall, we plan to grow our cost base by less than sales implying further margin progression.
Operating margins should improve to between 23% and 24% with the two key contributors being improvement in gross margins to between 1 and 2 percentage points albeit from the base that it's been reduced by inventory provisions.
And by holding R&D and SG&A growth to between 2 and 3 percentage points less than sales.
And finally, you will have seen from the press release, we're now expecting a tax rate of around 29%.
As for currency, today's currency profile probably a small upside to these targets.
The current Sterling volatility makes the benefit a little too uncertain to bake into the results of this stage of the year.
Maintaining this trajectory for the two years beyond 2005, gives us a good chance of hitting the 27% margin target.
As many of you have written, this target is being made more difficult by currency movements in the last few years.
And IFRS also raises the bar.
It isn't and it's never been an easy target.
But it is one that I continue to believe, expresses the underlying quality of our business.
And if we ought to hit it, I believe we need to do so in the next 3 years.
So what measure of confidence can I give you in our ability to deliver?
In the annual business review Tom talked about the productivity opportunities that need to be addressed if we ought to be competitive.
Now not just in the short term, but in the face of a toughening environment for pharmaceuticals.
Inside the company, the productivity program extends throughout every part of our business, including many initiatives in areas that have lain unchallenged by the industry.
But importance for you is the knowledge that this is not just a headline.
But that has been translated into financial targets and real actions across the business.
This takes you one step further, which begins to set both the performance measures and dollar targets for improvement.
Although you won't be surprised to learn that I've excluded the specific targets from this slide for obvious reasons.
But let me give you more flavor to it.
We've been working on this for quite a while.
It's the structured and progressive approach towards creating a company competitive for tougher markets.
It's not for cost reduction program that benefits for short term at the cost of the longer term.
The targets have been allocated across all parts of the business with key performance measures identified for each.
The gross margin has got to be real improvement beyond the trends on the Merck (ph) product.
We're looking at the distribution chain from the factory to patient.
That's (inaudible) cost per unit of volume.
That's factory utilization rates and so on.
In R&D, John has already spoken of the many important quality improvements we need to make.
But we to have quantitative improvements as well.
Whether it's cost per candidate drugs, clinical trial patients per employee or cost per patient in clinical trials, it's all got to be tackled.
In sales and marketing, the sales force effectiveness program needs to deliver more sales per employee, while our marketing spend needs to have more stringent and measurable return on investment criteria.
Accordingly, we should be looking to consistently grow the top line ahead of sales and marketing cost.
And finally the business has to be able to grow on the top of a bed of fixed cost that grow within narrow perimeters and not in line with sales.
This takes us to infrastructure costs and support costs such as IS facilities and the administrative functions.
So I hope you can see that we are serious.
So with the overwriting objective of being competitive for the long term.
Before concluding on our priorities for 2005, I want to say a few words on dividends distribution policy, recognizing of course that it's strategic use for the business will always be our first priority for fact.
Having said that, we fully recognize the importance you place on predictable returns in uncertain markets.
And accordingly, we're making clear connection between cash flows and shareholder returns.
We're planning to distribute all of the free cash generation over the next three years.
We expect dividends to grow in line with earnings to the balance of free cash flow available for share buyback.
In 2004, we generated free cash of $3.9 billion including disposal proceeds.
In 2005, we expect to generate a similar amount, which together with the higher dividends with still around $2.2 billion for share buyback.
As Tom has already described, priorities for 2005 become clear.
To deliver good earnings growth over the next three years by optimizing the top line potential to the many growth opportunities that exist within our product portfolio.
To deliver the productivity and cost management challenges, to realize margin improvements and progress towards our two 27% targets.
To maximize cash flow to drive enhanced returns to shareholders.
To continue to demonstrate the quality of our early pipeline, while managing overall pipeline risks, while pursuing all sources of growth for the mid term.
And with that, I'll now hand you back to Tom to begin the Q&A session.
Sir Tom McKillop - Chief Executive
Thank you very much Jon.
As usual we have the ability to take questions coming over the telephone line.
But can I take the first question.
And please could you remember to state your name and affiliation.
Yes.
Craig Maxwell - Analyst
Craig Maxwell from JP Morgan.
I have a question on development.
The development decisions made today tend to take about 2 or 3 years before we see the outputs of those decisions and I guess more specifically on Galida therapies and Symbicort, I thought would be true.
What can you do to convince us that you can have a real meaningful impact more near-term?
Sir Tom McKillop - Chief Executive
I guess it's a very good question and you're right.
I'm not in the position, nor is anybody in this industry to pull rabbit out of hats.
Instant gratification takes a few months.
Nevertheless, there are things one can do with the recently launched products in terms of lifecycle management activities in delivering some key indications that could have significant top and bottom line effect in the short term.
But the other thing is to look into the early development portfolio and start to bring those through rapidly and effectively.
Yes.
Unidentified Speaker
Just the details from Jon Symonds, please, on the headline results for Q4.
Dollar was weak during that period and sales, in constant currencies grew less than in dollars.
And yet, operating profits and earnings is the other way around.
What's going on there exactly?
Jon Symonds - CFO
Well, I think as we pointed out in the operating profit review at the back that it was really a consequence of some hedging gains that we incurred -- were incurred.
Or some hedging effects were incurred in the fourth quarter of last year.
So it is a distorted comparison on the growth rate, which is why you say a 3% on sales and 11% on profit.
It was really the hedging losses that occurred in the fourth quarter last year that made that distortion.
It wasn't anything that happened this year.
Unidentified Speaker
What sort of number are we talking about?
Hedging losses last year?
Jon Symonds - CFO
I think it was about 30 million, something like that.
But I can give you a more accurate figure afterwards.
Sir Tom McKillop - Chief Executive
OK.
Andrew Baum - Analyst
Thanks, Andrew Baum, Morgan Stanley.
Three questions, if I may.
First of all, the 27% margin target which you gave.
How much of the issue is one of timing that may take additional years to get to that.
Or you're trying to say that given the structure of your industry and forgetting about the Merck deal if it doesn't get to 20% by that time because of how your profile looks at the moment it's going to be difficult ever to get to that kind of level unless we see an evolution of your products.
Second, in relation to Crestor.
Obviously the outlook for Crestor, the challenges when you decided to market it alone were different, than perhaps now.
What would potentially cause you to rethink how you market that in terms of impacting upon your margin?
And then finally on Symbicort.
Obviously Astra's has its challenges in the past with devices in respiratory and the respiratory panel moves very slowly.
Realistically what do you think is the likely delay before you get launched in the U.S. market?
Sir Tom McKillop - Chief Executive
I'm tempted to take off here myself, Andrew.
No.
I mean the 27% target, we believe as Jon said is only the measure of the quality with which you can run the business.
It's dependent on your portfolio, the investment rates at which you're going in behind new projects, development and so on.
It clearly also reflects to some extent what happens in the external pricing -- externally in the pricing of product.
There are many, many factors can influence product.
But we still see it as a realistic but challenging target within the 3-year time period that Jon was talking about.
I don't think we have any more to say about the launching.
It's not something you can quantify.
You can speculate on a spreadsheet, you can change any element over there.
And you can play around it and it will move around.
You know it's a judgment of the fundamental quality of your portfolio of what may happen going forward and pricing and so on.
I don't think there's much more to say there.
Jon, you want to add anything?
Jon Symonds - CFO
I think we've probably given you the clearest picture on it that we have for some time.
And see both portfolio opportunities as well as productivity as being two of the key things that enable us to do that.
But I think it is also important to say that we would never run the business solely for achieving that.
And I think as Tom has said we will always want to make the right investments.
But this is it.
I mean we are intending to get there in this 3-year period.
Sir Tom McKillop - Chief Executive
As far as Crestor is concerned, I mean we are happy with the level of resourcing we have in Crestor in the field.
We don't think in any way co-promotion or co-marketing would have changed pattern we've seen so far, or that we require, going forward.
Symbicort -- it's a matter of stability data or - the device of the stability data comes out as we expect it to come out, we are going to be fine, in terms of our failing date.
If it doesn't we are going to have to go to the fallback strategy that John has talked about and that would require some delay, quantifying that due in a moment.
But you know let's see how it plays out.
We believe the stability data will be OK.
So no, I don't think there's much more to say there.
So I'm going to go to Tim Anderson in Prudential by telephone, Tim.
Tim Anderson - Analyst
Thank you, can you hear me?
Sir Tom McKillop - Chief Executive
Yes.
Tim Anderson - Analyst
Couple of questions, the first one Nexium.
If I heard you right you're saying that the lack of the cash care account you know you might be giving better terms and maybe what you would have forecast a year ago.
Seems like a year ago you were saying you are going to hold very tight on pricing.
I just want to confirm that I heard that right.
Then the second is on Crestor, and how you are seeing the tug-of war play out between Crestor and Vytorin.
Wondering what the key differentiating message is that -- that you guys are delivering to physicians to try to convince them that Crestor is better than Vytorin, thank you.
Sir Tom McKillop - Chief Executive
OK, I'm going to turn to David in a moment but I'll just say on the Vytorin front that the launches have not been terribly successful outside the US but I'll get David to comment on the Crestor Vytorin position in the US and also on the Nexium managed care pricing.
David Brennan - President & CEO
Well the, certainly in the next year manage care pricing there continues to be pressure on pricing as John mentioned, we think we did pretty well in 2004.
We have made some changes to our strategy to make sure that we can retain the access to the managed care accounts especially the PBM's that we want to have going in to 2005, and we think we have done that, so we're well positioned.
There is additional pressure on price, but I think we still believe that we can maintain the level that, you know, that will make us successful, and allow us to continue to drive share, which is -- what's at the top of our list.
Our strategy on Medicaid, is a little bit different than that but that's an access strategy so it will, you know, cause a bit of a difference in the price volume calculations.
Regarding Crestor and Vytorin, I mean the Crestor message is, has always been about efficacy versus Vytorin and its efficacy in one pill.
If you take a look at the data on switching what you see with Vytorin, is most of the business is coming from Zocor and Zetia, probably close to 30% another 25% or 30% from Lipitor less than 8% from Crestor, so from a switching perspective there is not that much going on.
I think it's a matter of reestablishing Crestor's efficacy profile and the benefit risk profile since the questions of safety have continued to come up, that's what we are working on right now.
Tim Anderson - Analyst
OK, thanks very much.
David Brennan - President & CEO
Yes.
Mark Purcell - Analyst
Mark Purcell from Deutsche Bank.
I just have two topics.
The first one is on Nexium.
It's just a follow-up on the last question really.
I wonder if you could give us an idea about how much Nexium price impact there could be in 2005, the opportunity with the NSAID indication.
And I guess you got some idea to how much capacity or supply Procter & Gamble have increased through September to January I guess they're going to re-launch the products.
Wondered if you had any comments as to the impact that would have again on the (inaudible) market.
And second one is on 2005 guidance and margins.
And I'm afraid I'm still back in U.K.
GAAP rather than in IFRS.
But if I look at the 2.11 and I -- EPS number and I add in the provisions and I add back inventory write downs, I get to 2.27, something like that -- I see a 24% EBIT margin.
Of course there's less product (inaudible) going forward, there might be less currency.
You've got to offset that against the Iressa disappointment.
If you keep your margin flat to 24%, which is underlying margin for 2004, for second half, your EPS number is about 2.60 and the guidance is below that.
So I just wondered why you are being conservative.
You clearly said you are expecting Crestor's market share to pick up.
And could you explain that a little bit further please?
Sir Tom McKillop - Chief Executive
Why don't you bring your spreadsheet and we will do it together, right?
Jon, you can pick that one.
Sounds like a really interesting question for you?
John Patterson - Executive Director, Development
P&G supply.
I mean, you need to ask P&G about that.
We are not going to talk about that.
What I would say is we supplied all orders that were placed on us by P&G and we will continue to our very best to do so.
And I tried to pull out what I thought were the two different battle zones.
If you want to talk about, what is Prilosec or EC doing to P&G, I don't think its going to have a terribly big impact on Nexium, the battle we are in.
So I can just try to deal with that.
Now on pricing I think we have given your a best shot.
Jon said we will continue to look at not price volume, any deals we go into, will always be economically beneficial deals.
We are not going to go into driving the price down.
Absolutely not.
But where we can see a better price producing a significant net economic benefit, we're prepared to talk to managed care.
And I think that's the key element on pricing.
Jon, do you want to ...
Jon Symonds - CFO
Yes, no, I was expecting somebody to do this, the calculation.
I think you have to look at three things, actually, in really understanding what the appropriate level of earnings was for 2004 when looking at 2005.
And there's probably three things.
Firstly, there was the $236 million, of provisions which clearly inflate the underlying numbers, that's one thing.
The second thing is, actually we are in quite considerable profits from Iressa in the U.S. also.
They have to take those up against that.
And that net number is more or less offset by the non-recurring gains on financial instruments that occurred during the year-end close after the swap.
So I think, actually, if you take those three things together, you're pretty close to the 2/11 numbers being I think a fair baseline in which to look at 2005 performance.
I mean there are other things.
There is, probably when you start adding back too many things, you start to get to some unrealistic especially, because there's always going to a number of moving pieces in any year.
It will be lower, the 130 million of the financial instrument gain obviously don't appear in the International Accounting Standards numbers.
But that's not going to occur.
And beyond that, because there was a chunk of disposal gains, it's difficult to foresee that.
And we are not predicting any additional disposal gains at this stage.
So it will be well down on last year.
Mark Purcell - Analyst
OK.
Thanks, Jon.
Sir Tom McKillop - Chief Executive
Just to show we can handle diversity, an e-mail question has come up from Mary Betty Goole (ph) of Raymond James.
He said D-6474 is not mentioned in the news flow for '05/'06, any change in the schedule for Phase 2 data due in Q1, 05.
John?
John Patterson - Executive Director, Development
Simple answer, no.
Latent data is still expected in Q1.
Sir Tom McKillop - Chief Executive
And then I will take another question by telephone from Marcel Brande (ph) in Chevreaux.
Marcel Brande - Analyst
Good afternoon.
Thanks for taking my question.
First of all I'm wondering why the hotline guidance is so conservative, mid-single digits.
I'm wondering what the assumptions behind that number are, particularly regarding Crestor for 2005, and maybe also Nexium.
And second question is, Exanta in atrial fibrillation.
Can you talk a bit about the nature of questions that you currently discussed with the regulator?
And the last question the cost of goods.
Besides the, if I just trip out the payments to Merck, then there is a significant jump in cost of goods from -- I calculate 18 to around 20%.
And we know that in both in Q3 and, it appears also in Q4 there has been about an 80 million or so charge?
Sir Tom McKillop - Chief Executive
OK.
I will deal with the last part of your question very quickly.
It's the provisions that has the impact on the cost of goods.
So that deals with that.
Mid-single digits, why are we being so conservative?
Maybe because we have been accused of being overoptimistic.
So you know, I mean we make our judgment; we certainly don't try to be over optimistic.
Unidentified Speaker
There still are patent expiries and reductions particularly in some of the European markets and the continuing reduction in the U.S.
So, I think, so far you can break these numbers out before you get you get the whole sales line.
But I think we've given you the pieces that we reckon to be relevant to this stage of the year.
Sir Tom McKillop - Chief Executive
And we are certainly not going to give specific product-by-product growth forecasts.
So I don't want to give a specific number for Crestor.
Jon, would you like to take up the question of Exanta?
Jon Symonds - CFO
Yes, I shall.
We don't -- well, we won't give you the exact words we are discussing with the regulators.
But there are very clearly some key issues.
The first one is, on the liver function area, what is the risk benefit ratio?
How I might want to elucidate it better?
What are the mechanisms?
What sort of rate we might predict?
Patients who might get the more severe raises in the ALT.
And then overall it's the question of what might be done, going forward to make us and regulators feel comfortable, so we could actually get a license for the product?
What the indications might be?
What the kind of marketing introduction we might have?
It's across that whole spectrum of activities that we are going to have to have, or are having those dialogues, in order to bee able to decide how to move forward.
John Patterson - Executive Director, Development
And there is another element, which is, how did we end up having no sense of the concern, the level of concern for the FDA had on liver.
They accept, but we need to talk about what is the learning from this experience for both sides.
Marcel Brande - Analyst
OK, thank you.
Sir Tom McKillop - Chief Executive
Take a question, yes?
Hemmings Gouch - Analyst
Hemmings Gouch (ph) from SG Cowen.
The question for John and Jon.
Jon Symonds, how could you give us the level of confidence that you did with the R&D productivity, ahead of John Patterson's development review, which hasn't finished?
And John Patterson, could you tell us what the financial aspects of your review in terms of looking at financial risks within the R&D portfolio?
John Patterson - Executive Director, Development
Just before the answer can I -- don't think of this as suddenly, we've gone into a review of R&D.
I mean, we have always done reviews of R&D, we have always done portfolio reviews, we have always done prioritization.
So this isn't some dramatic big new exercise that is going to transform the vision.
But we are trying to take all the learning and apply it across the board.
Jon Symonds - CFO
Well I think that's exactly, that is exactly what we all say.
I mean, Jon's been part of the Executive, as I have.
And we've being debating these issues for 6 months.
Now clearly John is going to form his own views and we'll work those in.
But, this isn't something that's just being done in the last few weeks, independently of the whole Executive.
That's the slide we took out.
We should have probably should have shown you.
It would have answered that.
In terms of quantitative analysis, looking backwards and going forwards there are a lot of good measures in place that Martin and others have put in, in the past.
Looking at numbers of trials per CRA, looking at the cost effectiveness throughout the whole development organization.
So there's plenty of those key markers in there that we can now work against.
The issue for me in terms of the review I'm currently undertaking is about quality of the work that is going on and the decision-making.
And that has to be brought in as John and Tom said, the big picture of the company and deciding where best to put our money.
Sir Tom McKillop - Chief Executive
I'm going to take a question from Lars Hevreng of Enskilda.
Lars Hevreng - Analyst
Yes, thanks for taking the question.
I guess I'm just wondering about the lease pricing in the U.S.
If you could give some comments on the figure product on change you made recently.
And also on the comments made on the follow-up slide to Exanta.
Could you tell when you present these data, how many months will the patient be -- been exposed to this follow-up treatment.
Thank you?
Sir Tom McKillop - Chief Executive
I've been quite catch with the first part of your question.
I know it was about pricing, but could you just repeat it?
Lars Hevreng - Analyst
Yes the pricing, sorry -- lease prices in the U.S., whether you could comment on these changes you have made in December or so?
What is the biggest product?
Sir Tom McKillop - Chief Executive
David, would you like to try to deal with the lease prices?
And John is on ...
David Brennan - President & CEO
We took some, we did not take any price increases in December.
We did have a price increase in November that was consistent with our pattern of previous years.
It did not include all of our products.
It included a select number of products.
My recollection is the -- for those products on an annual basis, the price increase was in the range of 3% or 3.5%.
I'd have to double check on that but I believe that was about what we did.
And as I said, it was not all the products.
And that was the last price increase that we took.
Sir Tom McKillop - Chief Executive
Thanks David.
John?
John Patterson - Executive Director, Development
And the answer is that we've modeled the liver changes on Exanta.
And by the time we come to our decision in the second half of the year, we would have had several 100 patients treated for long enough to know that we can exclude that kind of effects that we have seen on the ALT.
Sir Tom McKillop - Chief Executive
Lots of hands up.
I'm going kind of walk across the room.
One question, not five parterss.
Joan (ph)?
Unidentified Speaker
Can I ask a little more about your productivity plans?
And are there any one off payments of restructuring charges that you might need as you introduce factory changes or whatever?
And are there any visible measures that we are going to see in the workforce.
I think we have read about you not renewing contract sales forces in the U.S.
But I'm just thinking about how you can physically deliver the same amount of marketing message to support a higher sales with essentially little increase in costs.
If you can give us a bit more help on that.
And I'm going to push my luck on this, because it's the same area.
You've got the launch of Symbicort to come up at some point in the future.
You've given an excellent slide showing your extra marketing for the third and when you had the launch of Crestor.
Is Symbicort going to be like, as expensive for you ?
Sir Tom McKillop - Chief Executive
No, I don't think so.
And you must remember we had funds to launch Exanta.
And not launching Exanta forces part of the explanation for the contract fields force.
And it's very nice when you can switch something like that on and off.
Jon, you want to comment on the general productivity?
Jon Symonds - CFO
Yes, we are clearly looking at everything from through the top and the bottom of the organization.
And we certainly haven't reached all the conclusions yet as to what it might mean.
But we are not actually approaching this like we did at the time of the merger, where we had a fixed target and we knew what we wanted to reduce and we costed it and so on.
And there was an exceptional item.
And we are not approaching it like that as a sort of a one-off exercise.
This is much more fundamental.
We are not, we are looking for 100s of contributions through the organization to improve its productivity.
We're looking to release energy and speed and creativity to do things differently in every part of the organization.
And that will lead in some places undoubtedly to cost reduction.
In other places we may actually need to put the more resources behind it because we actually want to get a greater return.
So we are really setting this up as a progressive and longer-term project, that will deliver sustained benefits over time.
There may well be some costs associated with that.
But currently, we're expecting to take that in the flow, in the way we run our business.
But it is not anything like the sort of integration exercise that we started at the time of the merger.
It's a much more intensive and deeper exercise about the future now.
Sir Tom McKillop - Chief Executive
I'm not going to forecast Symbicort costs -- Symbicort U.S. launch costs.
What I'm going to say to you Jo is, it's factored into any calculations and any forecasts we have given you today.
Now moving across -- yes.
There are two hands.
See the one at the back first and then come to you.
Norton Hope - Analyst
Norton Hope (ph) from Eaton Group.
Tom, strategic question.
I mean you were applauded at the Strategy Day for being the first CEO, to openly say that it was ridiculous that the industry spent twice as much on marketing drugs as it does on R&D.
When we actually look at your results however, it's the R&D that seems to be where way you've really made some savings, particularly, in the last quarter.
And particularly given what's happened with currency, actually have gone the other way.
Could you tell us what your 3-year plan is for marketing spend, to go back to your observation about it being a ridiculous situation?
Sir Tom McKillop - Chief Executive
I'm not sure, I'd agree with your analysis of the numbers, Norton.
That's my first point.
R&D and think sales and marketing are both achieved quite significant productivity enhancements.
And I phrase it chiefly that way because we have not been cutting R&D costs.
But we have been getting significant productivity enhancements that is allowing us to put on a bigger portfolio, with a modestly increasing cost base.
As far as the general industry position is concerned, it would be lovely if the level sustained in sales and marketing were moderating somewhat.
That would, I believe, in aggregate help the industry to correct some of the damaging reputation of stock.
Further you cannot, as one company you cannot go there and suddenly withdraw your effort or you will be hammered competitively.
So we are in a situation where I believe the external pressures, the general external pricing pressures that are actually beginning to force the restructuring.
What we have been trying to do and by restructuring, I mean restructuring of the cost base, I don't mean consolidation.
And what we have been trying to do is get ahead of the game by doing a lot of piloting from different models.
How would we handle a different pace altogether?
And we are trying to be ready, so that we can move at the right moment without loss of competitiveness to gain competitive advantage from a changing cost base.
I am sure it's going to come in the industry.
And I think it's very important that the industry can get back to its heart and soul of bringing through valuable only new medicine and society recognizes.
That's principally what we are doing.
I believe the DTC has actually been a negative factor in the perception of the industry even although it's informed patients exceedingly well, in the United States about the availability of products.
And it's supported by many, many groups of people that reputationally, it has helped the industry.
So I would love to see that change coming about.
But we cannot do it in a fashion that would make us uncompetitive.
Yes, just in front.
Thanks.
Nick Turner - Analyst
Thanks.
Nick Turner from Jefferies International.
I have a question on Crestor.
And you have advised the physicians recently that in some ethnic groups they shouldn't go for the 20 milligram dose.
Is there a danger that physicians will read that as not going to give 20 milligrams in all patients.
And the second question that's related would be, what prompted that?
You've said earlier that you not seen any major adverse even from Crestor.
But what is the issue with 40 milligrams in Asians and Japanese patients
Sir Tom McKillop - Chief Executive
Well it's very simple.
Pharmacokinetics, the studies we have done have shown you will get a higher blood level in Asians.
And therefore 20 is equivalent to 40, in Caucasians and so on.
It's nothing more than that.
It's not safety related.
Nick Turner - Analyst
So there is no toxicity issue on that?
Sir Tom McKillop - Chief Executive
Not at all.
Nick Turner - Analyst
OK.
If you stick at a 20 milligram dose, which goes back to the second point of that question of physicians may be seeing 20 milligrams as a top for everybody.
If you have a restricted dosage range of up to 20 mgs.
What's the odds on that.
And if that is the case, would you see a situation where the efficacy advantage perhaps of Crestor isn't negated?
Sir Tom McKillop - Chief Executive
No. 20 is roughly equivalent to 80 of a atorvastatin.
And yes, you may look surprised, go back and look at the Charts, they are roughly equivalent to 80 of the atorvastatins.
We believe 40 is needed for only a very small percentage of patients, roughly 3% of patients.
Yet 40 milligrams of Crestor.
Those are patients who are very difficult to treat.
The difficulty with 80 milligrams of atorvastatins is the HDL comes down.
That is not true of Crestor. 40 milligrams for those patients for Crestor gets the LDL done better than 80 of Astorva and retains a good positive response in HDL.
And for that subgroup, very small subgroup, so not of any great financial significance that is a new clinical need
Yes, now move on
John Murphy - Analyst
Thanks.
John Murphy, Goldman Sachs.
Coming back to the productivity improvement slide.
And Jon Symonds, one of the slides you showed, this is obviously key to the margins target and key to the earnings progression as well.
Just wondering if you can tell us, kind of a little bit more about it, obviously you don't want to give us the kind of, numerical detail.
But maybe in terms of how long has this been in place, in percentage basis, maybe how far true value?
How long before you can get to that end, because I guess this is possibly one of the least tangible areas certainly when you are sitting on this side of the table anyway.
So just anything you can give us there to maybe try and help us understand that process a little bit more?
Jon Symonds - CFO
I think this has been a journey actually from many years that just started with the merger taking up years of overlap, looking at the distribution of resources behind different types of products, working out the optimal spend that's needed to generate top line flow.
And each time we've asked the question, we've seen more opportunity to improve the quality of what we are doing.
And we now want to sustain that and to try and make a bit of a step change in the way we look at cost in an environment that may have more pricing pressure, going forward.
And for that reason, it is very difficult to isolate it into 2 or 3 things.
It's not that.
I mean, David probably got 20 things that he has been working in the U.S.
Martin and John elsewhere trying many, many things I would like to see the margin progression as the way in which you can see us delivering it, rather than trying to break it down into little components because we really want to push at the boundaries of what the industry needs to do to bee competitive.
Sir Tom McKillop - Chief Executive
I've been getting messages for some time now.
Please round up.
With my usual disrespect, well, I am going to take one last question.
Who would like it?
And make it an interesting one.
OK.
He would think I lost it.
Who're you nearest?
We'll take the best and nearest to that microphone.
Who's nearest that microphone with a hand up.
Come down here.
You are only one who kept your hand up, I think, so please go ahead.
Nichol Simon - Analyst
Lucky, lucky me.
I hope I am - I hope it's interesting.
Nichol Simon (ph), Deutsche Bank.
Tom, I wanted to come back to the SG&A question, because it does seem the more pharma companies you talk to, the more there is a recognition that sales forces, I won't say are inefficient, but could be more efficient, but numbers are very high so on so forth, you know the argument.
You talked about -- you all seemed to recognize the need to change the model in some way.
But you talked about the need for a catalyst.
I just wonder whether you care to talk around what you think that catalyst may be.
Or whether that a particular leader out there wrote phenomenal scales, which is the confronting issues, but may actually drive that change internally.
And to what extent do you talk to each other about a need of change.
Sir Tom McKillop - Chief Executive
You know, we'll go to jail if we talk about that.
I mean, seriously.
We are not allowed to talk about that because that could be construed as conspiring in some way.
So we just simply cannot.
And the only way we talk on these matters is actually through these kind of question and answer sessions, which is interesting.
I believe that our catalysts, I believe there are things happening out there, I know.
I think probably a number of companies are exploring different things.
And we're going to see progress.
It will be little bits of progress.
It's not going to be suddenly a dramatic thing.
But I can tell you, we are doing experiments where we can see the particular regions, particular areas, things we've done are having a very positive effect both in terms of the impact of the style of detailing, but also the cost of that detailing.
And as you begin to learn those lessons, identify them, you could see the model change.
But I think it's going to evolve, rather than being a sudden dramatic move.
The other point that I'd make is there isn't a shred of evidence the scale brings benefit beyond a certain side.
Not a shred.
And we monitor this very, very carefully.
So with that, can I thank you all very, very much for your questions.
I apologize to people who didn't get an opportunity to ask including those who were waiting to come on the telephone.
Thank you all very much.