AstraZeneca PLC (AZN) 2005 Q3 法說會逐字稿

[Audio started in progress] Mike Rance, Vice President Corporate Affairs and Ed Seage Director of Investor Relations.

Before I hand over to Jon I'd like to read the following statement.

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

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

By their very nature, forward-looking statements involve risk and uncertainty and results may differ materially from those expressed or implied by these forward-looking statements.

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

I will now turn the call over to you Jon.

Thank you Jonathan and good afternoon everyone.

I tend to follow a usual agenda on this call, to firstly review the headline numbers, to go through the key product highlights, provide some commentary on cost trends, margins and currency, concluding with our latest thinking on the outlook for the full year.

I will then hand you over -- back to the operator for questions.

First the headline results.

We delivered another excellent quarterly performance, in line with the trends you have now been seeing for four quarters.

Sales increased by 9% in constant currency to just under $5.8b for the quarter.

Operating profits were up 45% and earnings per share were $0.76.

Note that earnings per share in the third quarter last year included a $0.17 benefit from non-recurring items.

From the disposal of the Advanta business and the recognition of a tax credit on the Zolidex settlement.

Excluding those items, earnings per share were up 52% for the third quarter.

For the nine months it is a very similar picture.

Constant exchange rate sales growth of 10%, operating profit up 44% and earnings per share at $2.14, up 42% excluding the non-recurring items I have just referred to.

Our five key products, Nexium, Crestor, Symbicort, Arimidex and Seroquel continue to be the engines behind the sales growth.

These products had combined sales of $2.7b in the quarter, up 25%, from accumulative sales of $9.7b for the nine months now accounted for 45% of sales, up from 38% a year ago.

So let me comment on now these five products, first Nexium.

Nexium sales were up 18% in the quarter to $1.1b.

Sales in the U.S. were up 17% versus the third quarter last year, which had some de-stocking associated with it.

Dispense tablet growth in the third quarter was 13%, partially offset by lower prices.

Nexium volume growth was well ahead of the U.S.

PPI market overall, which is up just 4%.

Market growth continues to be dampened by Prilosec OTC, but also from the sharp decline in the NSAID pain reliever market.

But our performance in the marketplace continues to be excellent, and we continue to capture a market share.

Total prescription share in the U.S. is up 2.2 points since the beginning of the year to 29.1% in September.

We are neck and neck with Probecid in total prescription.

But when you look at extended units, which we believe best reflects our sales mix, we are beginning to pull away as market leader.

Nexium sales in other markets were up 19%, with notably strong growth in France and Germany.

Crestor sales increased by 23% in the third quarter to $325m.

Sales in the U.S. were up 17%.

Our share of new prescriptions in the U.S. market continuing to edge upwards, 6.8% in the latest week.

More encouragingly Crestor's dynamic market share of new and switched patients is now at 9.9% demonstrating our long-held belief that when we can focus on the product benefits we can grow market share.

In other markets, sales of Crestor are up 34%, chiefly on good growth in France and Italy.

Symbicort had another good quarter too, with sales up 28% to $240m.

The U.S. filing for the PMDI formulation for asthma was submitted at the end of September.

And earlier this week we began the EU mutual recognition review for a new asthma treatment concept, Symbicort Maintenance and Reliever Therapy.

Arimidex continues to build on its market leading position amongst the aromatase inhibitors for the treatment of breast cancer.

Worldwide sales were up 36% in the quarter, exceeding $300m for the first time.

And in the U.S. sales were up 40%.

Arimidex share of total prescriptions for hormonal treatments for breast cancer reached 33.2% in September, up 1.6 points in the quarter and more than 6 percentage points since the beginning of the year.

And finally, Seroquel had another excellent quarter.

Third quarter sales were $706m, up 30% in the U.S. and 41% in other markets.

In September U.S. new prescription market share increased to 29.7%, the only brand among the top three to increase market share this year.

Those were the product highlights, and before I deal with the financial performance, a few words on the R&D update in today's press release.

Firstly you will have seen that we have taken the decision to accelerate AZD2171 into Phase II/Phase III development. 2171 is our VEGF signaling inhibitor for the treatment of solid tumors.

This comes soon after the decision to take Zactima into Phase III, and is indicative of the strength of our oncology portfolio.

Following the outstanding results from the second pivotal trial for Seroquel in the treatment of bipolar depression, the boulder two study, we expect to file in the U.S. at around the end of the year now.

Cerovive clinical trials are progressing well.

The chance trial in hemorrhagic stroke is now freely recruited and the results should be available in the first quarter next year.

And the regulatory submissions for Cerovive are now scheduled for the first half of 2007, assuming, of course, positive outcomes CHANT and SAINT II.

Finally, we completed the filing for Symbicort in the U.S.

So we continue to make good progress on the pipeline.

And during quarter two, two projects have been discontinued.

The oral extended release formulation of the anti-arrhythmic agent, AZD7009, although the IV program continues in Phase II.

And AZD7131 for the treatment of over-active bladder.

You will have also noticed that the last few weeks have been busy for our lawyers, with patent challenges to Nexium, Seroquel and Pulmicort Respules.

We are fully prepared to face these challenges and will vigorously defend our intellectual property.

Finally, moving to the P&L.

Operating profit was up 45% in the quarter, with currency having no effect.

The underlying themes are the same as I have explained for the last few quarters, with a strong top line dropping through to profits as we continue to tightly manage our fixed costs and deliver the promised productivity benefits.

For the first time since I targeted a 27% margin, our margin for the nine months exceeds this target, with the third quarter margin reaching 29.3%.

So what's going on?

And why do we continue to exceed our own forecasts?

First let me say that with a 78% gross margin, and they're even higher on a marginal basis, it doesn't take much of a positive benefit on the top line to boost earnings per share.

It takes only an additional $150m of sales, well less than 1% of total sales, to add almost $0.05 at the bottom line.

And the fact is that this year our performance in the market place has been excellent.

All of our five key growth products are winning market share against stiff competition.

But it's probably fair to say that it's on the cost side where we are doing better than you expected, and better than we expected as well.

And there are really three things which underlie this performance.

First, genuine in productivity improvements.

This program is not a one-day wonder, but it's something that we've been stressing to you for well over two years.

Projects have been initiated across the whole business, and we are now probably on the second or third wave of these plans, and our targeting of areas of efficiency is getting better and better.

Whether it's reducing the costs of product supply, driving higher quality details from our sales force, improving the allocation of sales and marketing resources, or simply managing our IS infrastructure better, we have a single-minded focus on being better at what we do.

And, as I've said on many occasions, we are not talking about cost cutting, but a fundamental shift in the way we do business.

With a high emphasis on better customer outcomes and return on investment.

The simple fact is other industries started this years ago, and we've still got a long way to go.

Secondly there is no doubt also that our position in the investment cycle favors margin expansion.

Crestor is now in its third year since launch, and with this has come a moderation in our sales and marketing investments.

And this, coupled with the majority of our pipeline being in early to mid-stage development, our late-stage R&D costs are inevitably lower.

But with a number of products moving towards Phase III, some of which I have already described, we would expect R&D investment to increase in the coming quarters.

Finally and thirdly, and this is the hardest to demonstrate, there is undoubtedly a behavioral component.

Our employees understand why we are focusing on productivity, and are positively helping us by voluntarily stopping activities that have low returns, and it's this factor, I believe, that is reducing costs faster than we can currently predict.

While much of the productivity program is based around initiatives that have a two or three year duration, others which simply involve stopping low value activities can be only achieved once.

And therefore our cost performance, achieved in 2005, can not be sustained to the degree that we've seen this year.

The downward trend will flatten, and in the fourth quarter we foresee an increase in sales and marketing activity that will give an overall increase in fixed costs in the final quarter.

I'm sure we will come back to some of these themes in the Q&A session later, but before that, a quick comment on the quarter gross margin.

You will have seen the gross margin improve by 2.9 percentage points in the quarter.

But this was after $80m of provisions for Exanta in costs of goods in the third quarter last year.

Adjusting for these, underlying gross margin improved by about 1.9 points, net of currency.

And you'll also recognize that further provisions for Exanta and [Iresta] were made in the fourth quarter last year, which will also flatter gross margin.

Before coming to guidance, a brief word on currency.

You will have seen in the third quarter the currency benefit was just 1% on the sales line and neutral to operating profit.

The absence of hedging gains made in quarter three last year led to the currency-related $0.01 reduction in earnings per share this quarter.

I am sure you are aware of this, but we are not making hedging gains this year, because we no longer cover forward cash flows.

This means that the currency impact in the quarter is what it is.

And we take this view because the distribution of our sales and costs act as a natural hedge.

For the nine months, currency has benefited earnings per share by around $0.06.

But based on current exchange rates it looks as though around half of this will drop away in the fourth quarter.

Our cash generation remains excellent, and we now expect share repurchases, which totaled $2.1b for the nine months. to exceed $3b for the full year, in line with our expectations for fourth quarter cash flows.

Finally, before coming to the question and answers, our revised outlook for the full year.

Sales growth for the nine months is now 10% in constant currency, which is broadly where we see it now for the full year.

And together with our expectations of an increase in costs in the final quarter, we now anticipate earnings per share for the full year to be in the range of $2.85 to $2.95.

Based on the sales and cost trends we are currently experiencing, we would expect to be in the lower half of this range.

But given the comments I have made about our cost behavior and discipline, it's not impossible that further cost savings could take us to the upper half of this range.

It is also worth recognizing that as some of our productivity programs progress, we may need to invest to generate future benefits.

And this is particularly true in operations where we could see some future asset provisions.

So let me close by saying that it's been another excellent quarter, with a strong performance from our key brands, both in dollars and in market shares.

And with good control on our cost base, we have been able to generate excellent earnings growth.

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

Thank you sir. [OPERATOR INSTRUCTIONS].

We take our first question from Andrew Baum of Morgan Stanley.

Please go ahead sir.

Good afternoon gentlemen it's Andrew Baum.

A couple of questions if I may.

First, Express Scripts have announced that they are receiving rebates in relation to Zocor from Merck and the implication is, for Merck at least, that this is a secured Vytorin preferred status on formularies from next year.

I'd like, if you could talk about that in relation to getting Crestor preferred status, and whether you can use other products within your portfolio, such as Nexium, in order to achieve a similar goal.

And the second question is really directed at Jon, and relates to sustainable R&D spend, and I'm going to use percentage of sales just as an easy metric.

As we look a few years out, where do you think the R&D as a percentage of sales should be for AstraZeneca, just to help us model within that forecast?

Okay.

Andrew, I'll answer the first question as well.

I think there are a variety of strategies that have been used to gain formulary positions in the upcoming Medicare negotiations.

We certainly also adopted a portfolio approach with Seroquel, Nexium, Toprol-XL, Crestor and so on, being a very attractive package for managed care, and in particular the new Medicare arrangement.

Such that now that largely the formulary discussions are complete, I think we are pretty satisfied with the level of access that we have to our products in the plans that have been completed.

So, without going into any of the details of the specific contracts, I think we are very satisfied that our product will have appropriate access.

I think the fact still remains in terms of what we know and what we don't know.

We don't yet know what the final -- the final detail of the plans are in terms of [structures].

The big unknown is that it's not until the middle of next month that any of these plans begin to enter into enrolment.

So we've potentially got 26m people out there who are either were previously non-eligible or are dual eligibles.

And I think it will be still be some way into 2006 before we really get a good sense as to how formulary positions will play out company by company.

But I think it's still fair to say that we believe the impact in '06 to be broadly neutral.

And I think we, like others, are still unclear in terms as to what the longer-term pricing consequences will be.

On sustainable R&D, we're clearly around the 14% mark this year.

And as I said in my introductory comments, we've been able to benefit margin this year because of the productivity, but also where we see our spend in the investment cycle.

To be honest, I've always hesitated in setting a specific target for R&D going forward because our basic philosophy is that if we have good projects, if we have good opportunities, we will invest in them.

And we have never set limits in terms of spend by saying you cannot get above 16% of sales and therefore that sets a cap on what we're able to spend.

And I'll have no hesitation in taking it to 14, 15, 16 or whatever if we can justify to you that the quality of the programs warrant the continuing investment.

But I think it's probably fair to say that this year will represent the low point in the cycle, although don't forget there's another dynamic going on in this percentage of sales, that that's the top line.

I'd say that the margin increase this year is more to do with the success of our sales of our products in the market than it is by cost management alone.

So it will increase, Andrew.

But I really would not wish to be bound by a target because the target will be determined by opportunity.

Okay Jon.

Thanks.

Thank you.

We move now to David Moskowitz of Friedman, Billings, Ramsay.

Please go ahead sir.

Yes.

Thanks and good morning.

I just want to ask the question a little bit differently on formularies and the statins.

Can you talk about, in a broad fashion, the formulary uptake for Crestor.

Obviously sales are still improving and I just want to get an update on that.

And also back to the R&D question, would you expect R&D growth in the upcoming quarters to be ahead, or essentially at, what you'd expect sales growth to be?

Start with those two.

Yes, okay.

I'm not prepared at this stage, particularly as we're in final stages of -- the very, very finals stages of pulmonary positions to really go into any of the details that lie behind our formulary strategy for any of our products or, indeed, any of the terms that we set for each of them, other than to go back to what I say before, is that at this point we have met -- pretty well met all of our access targets for our key products.

I'll try not to answer the question on R&D in the same way as I did before.

I think we -- R&D investment is the life blood.

And we've never, ever attempted to take a short-term -- a short-term view on what is necessary to support and sustain the business going forward.

And to that extent it is an independent variable to what happened on the top line.

And that's part of the discipline that we are putting in the business.

And the same is true of sales and marketing cost, actually, that we don't allow the top line to establish a bound of acceptable investment.

We take the same view with them as well, and justify what you need independent of what we believe the top line should be capable of achieving.

But I think you will -- I think you will see the rate of growth of R&D get closer to the sales line.

But again, I wouldn't hold that out as a formula, particularly actually because we haven't yet formalized what the final shape or the final investment plans for our business for 2006 is.

We haven't completed our final discussions on budget.

So we will give you more detail on those questions in January.

Great.

And just one follow up.

Could you talk about any specific product stocking or de-stocking that occurred in the quarter?

I am very, very pleased to be able to say that this has been the cleanest quarter that we've reported and that the only stocking impact that are of note are really some de-stocking which happened in last quarter -- sorry, in the quarter three in 2004.

And Nexium was the principle product involved.

And the press release highlights the fact that the reported sales growth of 17% in the quarter is a bit ahead of the underlying because of inventory movements.

But I think we have finally, with the help of the wholesalers, hopefully put that volatility to bed now.

Thank you, Jon.

Thank you.

From Prudential Securities, Tim Anderson.

Thank you.

A few questions.

On Nexium for 2005 you guys talked about offering a better price selectively to commercial plans and to certain medicate programs.

And I'm wondering a year from now, or at some point in 2006, what do you think the trend towards needing to rebate is going to be in this particular category?

Do you think it's going to be at the same rate it is now or do you think you're going to see increased pressure to step it up?

The second question relates to Medicare Part D and the dual eligible impact on your P&L in 2006.

It seems like products like Seroquel could see a very nice step up in sales, at least for 2006, and I think Nexium might benefit as well.

And then the last question on your pipeline, on AZD2171 and AZD6474, hoping you can give us approximate filing timelines.

And on some of your products, like Cerovive, you have, indeed, given timelines and I hope we can get the same with these two drugs.

Okay.

Nexium firstly.

It's a very competitive market, if not one of the two or three most competitive markets.

I think we have certainly delivered what we said we would do with Nexium this year, which is strong volume growth at modest -- with modest price effect.

There was a small negative price effect in the quarter.

But year to date the overall price effect is broadly neutral.

So notwithstanding the fact that a year ago we talked about this as being very competitive, the structure of the contracts that we have with managed care, which favor enhanced market share, have delivered value to us and, I think, value to the managed care organizations.

I don't see any change in the competitive dynamic going forward and we would ordinarily plan that there will continue to be pressure on price.

And so long as we have the right contracts in place then we can continue to deliver volume growth without significant erosion in pricing.

So I wouldn't, from here, wouldn't really be signaling a shift in the dynamic of the PPI market over and above what we've seen so far this year, although many of the contracts do tend to get revised towards the end of the year.

But nonetheless, this year's been a pattern that we're comfortable with.

The dual eligibles do provide a switch from Medicaid into Medicare and I think, as everybody understands, Medicaid pricing is lower than the commercial pricing and so to the extent that patients switch from Seroquel patients switch from Medicaid to Medicare, there is a price benefit.

I think we should look at the Medicare in the context of a whole in that the overall ambitions of Medicare Part D was to provide benefit to a significant number of people that didn't previously have it.

There is a price negotiation.

And I think, overall, it will be a good deal for the government, a good deal for the patients and good deal for the industry by solving a major uncertainty.

I'm not sure that -- I think it's too early to tell what will happen with other product categories.

And certainly we can't see with any clarity how Nexium will unravel as patients enroll into the new contracts.

Jonathan, do you want to just pick up the final two questions?

Yes, just in terms of timing on 2171 and Zactima, we don't tend -- we haven't actually given a deadline for the filing on those.

We update the pipeline table twice a year, so we will do that for both of those products in the full-year results.

But it's worth remembering with them both being in oncology, the phase III programs in oncology are often event rate driven.

So in and of themselves they're not particularly easy to predict particular end points.

And with 2171, we're following, again, something that's unique in -- uniquely seen in oncology, a hybrid phase II, phase III program that starts out in phase II, but it's built with the capability to roll straight over into a phase III program if the results warrant it.

2171 is that phase II/phase III program, that could be a pivotal registration trial and potentially the only trial that you would need to file on?

That's exactly the point, yes.

Multiple doses, multiple tumor types with both active and placebo comparators.

And it allows you, if you get the data you want, to take it straight into a phase III program.

Thank you.

Thank you.

Next question please.

Thank you.

Alexandra Hauber of Bear Stearns.

Yes, good afternoon.

Jon, at the beginning of the year you were linking your 27% margin target for '07 to, I believe, about a [5%] top line growth outlook.

I was wondering, since you made the comments on the tape, that you see margins at around 27.5, whether that is also linked to a certain top line growth that even your comments -- your various comments on the call, on the importance of the top line, that if you were to see sales growth in a high single digit range that that margin guidance, of course, wouldn't apply.

That's question number one.

And question number two is why would we -- why should we expect SG&A to increase in absolute terms by a significantly larger amount in '06 compared than in 2005, given that you have new launches maybe, apart from those behaviorable components which, of course, you cannot really quantify.

Okay.

What I was saying on the press this morning, and inevitably people are saying well, you've beaten 27% in the nine months, so where do we go from here.

And it's a fair question.

I got it at the half year too.

The -- you picked out one of the two factors that has driven margin.

Product mix, with the specialty products, and the strong performance that we've had in the marketplace.

And yes, for sure, if that continues more strongly, more of that will drop to the bottom line and clearly will provide you a higher margin because we have de-linked, as far as we possibly can, the profile of our cost from the top line.

As we have already spoken on R&D, and as already said on SG&A, we also don't necessarily allow people to be able to invest what they see as sales growth.

So there is potential for margin expansion.

And we're not going to stop any of those productivity programs just because we've achieved our target.

The target for productivity programs are also there to help AstraZeneca compete successfully in more challenging markets.

And we've already talked about one of those factors that could be more challenging and that's year two or three of the Medicare program which you could foresee leading to a tighter pricing scenario.

So we've got to be competitive in that kind of environment -- in that environment too.

What I'm not at this -- at this point in time is to say well, we've got 27, here's a new benchmark.

That doesn't mean to say margin will stick at 27.

It will oscillate, I think, was a word that was used on one of the tapes this morning.

And I think that captures it very well, from my perspective.

It will oscillate around 27% according to how we see the investment opportunities.

And clearly -- we're signaling very clearly that we expect to see R&D investment from here on.

Turning specifically to SG&A, and we haven't finalized our spending plans for 2006 because we're in the midst of the budget cycle, we -- to some extent we operate the philosophy is that if you can see return we will allow you to invest.

And that is what is happening in the fourth quarter that our performance in the marketplace in quarter three were, I think, we did exceptionally well on market share growth in our key categories in the U.S. and in many of the markets around the world is that we're now investing more behind some of those products because we see opportunities to drive it forward.

And that will have a beneficial effect on the top line.

So I believe that we have got a really, really good discipline, that is focused around justifying what you need to spend, some really good metrics and techniques to demonstrate where we are gaining a return on that investment, such that the trend to improving margins will continue.

But what I don't want you to do is get carried away with margin -- progressive margin growth from here because I do want to say that we will invest in the business for the long term.

But that could well mean that we have a year or two above 27 and maybe a year or two below it.

And that will really come down to how we justify our investment plan.

And again, I prefer to be more specific on those with our year-end results because we will have completed our review of what we want to invest in next year by then.

Thank you very much.

Thank you.

We move now to Mara Goldstein of CIBC World Markets.

Yes, thanks very much.

On the expense side you mentioned a number of times that you are seeing disciplined approach to the expenses.

But maybe if you could just dig down a little bit and give us an idea where that is coming from, both on the SG&A side and on the R&D side.

And then secondly, some of your peers have talked about having a shorter number -- rather fewer number of days in the fourth quarter this year versus last year in terms of accounting for sales.

Does that impact you at all?

The last thing, we don't -- we don't get too wound up on the calendar.

It's usually no more than one or two days, and then depending on where holidays or Thanksgiving falls it tends to even it out.

So there's nothing that I would really say about days in the quarter as being of any real relevance to our forecast for the year.

In terms of productivity, I would love to spend the next half an hour answering this question because then I could really give you the sense of just how deep the program is.

I have to say, and I'd love to be able to claim this, that AstraZeneca has some unique formula to delivering productivity.

It actually comes down to doing the basic things better and better and creating and organizational mindset where it says well, we did this well last year, how do we do it better next year.

And that's what I meant when I said, in the opening comments, that we were in the third -- second or third waves of some of these because what we saw as difficult two years ago we now see as possible.

And what we see as difficult now will undoubtedly be possible in two years.

It stems from -- it stems from simple things like in manufacturing, a single-minded focus to make sure that volume growth is greater than the cost growth in the ingredients that generate volumes.

So are we getting better raw material contracts this year over last year?

Are we managing our site input more efficiently such that our site costs or the site fixed costs grow lower?

On sales and marketing, we have got some really, really good tools now to evaluate the value of sales and marketing, to make sure that we are putting our resources for each product against the areas that generate the greatest return.

And we can measure return on investment.

And we have got a -- and this is where it comes down to really basics, a significantly enhanced chartered account around the globe that enables us to do cost comparisons across every single market, for every single product, for every single cost category to identify which markets, which parts of the business do it better than others and can we translate that across.

R&D we're looking at electronic capture of data, trying to take all of the paper trail out of clinical trials.

We're looking at a much greater distribution of our patients around the world, to take account of the fact that in China or in India you can get 10 patients in a clinical trial for the price of one in the U.S.

It's those things multiplied 25 times that really give us the confidence that we are managing the business effectively, without taking out any of its productive capacity.

And those who -- those who think it's cost cutting just really don't understand the depth and the quality of the program.

Maybe there's another time that we could devote an hour to this subject, because it is a common -- it is a common subject and something, frankly, I think we are proud of.

We've got 60,000 people in the organization who are asking questions about how they approve rather than 10 people in the executive saying this is your budget and you can't got over it.

That's probably all I've got time for, Mara, otherwise you'll keep me going for the rest of the afternoon.

Okay.

Thank you.

Thank you.

We move now to the next question from Kevin Wilson from Citigroup.

Thanks very much and good afternoon.

Just three brief questions.

Could you talk a little bit more about the sensitivity of detailing or the sensitivity of your sales to increased detailing.

So in your experiments and changes that you've brought in the U.S. market and organization, do you still see a degree of promotional sensitivity to your key products.

And, if so, does that impact your thinking if your competitors are, perhaps, not investing quite as heavily in sales and marketing as they may have in the past.

Or, to wrap that up, where are we on the marketing wars front?

Secondly, looking more specifically at the atypical anti-psychotics and total prescription numbers there which seem to be trending to a much lower level of growth of late, could you give us some sense of your take on that and the trend for '06, and also throw into that what you did with the price of Seroquel in the last quarter.

And finally, just thinking very long term, I know, three years out in terms of operating margin, can you talk a little bit more about the Merck situation, the mandatory redemption and the impact that will have on operating margin, or are you going to do a specific seminar about that?

Thank you.

Okay.

Thank you Kevin.

I'll deal with the first and third and then I'll come back to Seroquel because I've got to do a little bit of the digging on that one.

I think what you're saying about promotional sensitivity, and I would use it as that rather than detailing sensitivity, because I think what we have really been doing over the last few years is really understanding where the promotional sensitivity is.

There's no doubt that in the early stages of a product life, the promotional sensitivity lies in detailing because largely it's an educational process, and that's also true when you've got new data to talk about.

I think at other times, where you've got a clear message and a well-educated physician base, actually other forms of promotion become more important than retailing, whether it's opinion leader symposia on the disease or whether it's direct to consumer, it does tend to vary.

And I think that's what we've tried to adopt is a model that doesn't say you've got to have fixed inputs for detailing, inputs for DTC, inputs for managed care contracts and so on, is that what we've tried to do is to say well, how do we optimize the mix?

And at times we are increasing and other times we are reducing.

And we have reduced ourselves, of course, in the U.S. for many reasons.

And have been allowed and have been able to reduce the two contract sales forces we got there because our understanding of genuine promotional sensitivity has got better.

And it does vary product by product.

And sometimes it varies quarter by quarter.

And again, I could take a while talking about each individual product, but maybe another time.

On Merck, yes, we are -- we are planning to hold an educational session.

What we are finding difficult is fitting it into a very busy fourth quarter because the guys that need to put that together are up to their eyes in Sarbanes Oxley and other activities that they have to deliver for this year.

And I would like to say it's something that we could just trip off in no time at all.

But I think, as you no doubt already know, and as you will certainly appreciate when we get to do it, that this is a very complex arrangement and requires quite a lot of time, care and thought.

So I haven't gone back on my commitment.

I just find we're struggling to find it at a time where it makes sense for us.

And if it's not this quarter, and it probably won't be at this stage, we will try -- we will try and get it into the first part of next year because I know that the substance of your question about what will happen to margins going forward is an important one.

And that is fundamentally the question that we want to help you with.

Having said that, I'm going to give you a simple answer to the question.

I think you've got to think of it in two -- I think you've got to think of it in a number of dimensions.

Number one, cash versus accounting.

The payment out to Merck in 2008 will relieve us of payments -- contingent payments to Merck on a number of products.

And the number of those products will depend on really what -- how Merck exercises the choices that it has in 2008, and I clearly can't comment on that.

But undoubtedly, by making that payment and relieving ourselves of cash payments to Merck on a quarterly basis, there will be a benefit to cash gross margin.

What I can't tell you, and this will also be, I think, a feature of the discussion that we'll have, is how we account for it.

The accounting for intangible assets around -- under International Accounting Standards is very, very complex.

And I cannot, today, give you a clear answer as to when that payment is made, how the intangible asset will be amortized.

I'm pretty sure that when the time comes that we will want to steer you towards cash gross margins as opposed to accounting gross margins which have got accounting allocations against them, some of which might be quite difficult to rationalize.

So I think we will want to direct you to do that.

I think the second part of it, the 5% that we currently have our margins reduced by these payments, how much will the ongoing, that is, payments to Nexium and Prilosec and how much will be relieved.

It may be that something like one third or so will be relieved, and two thirds will continue because the ongoing payments to Merck will likely continue beyond 2008, although again, you've got to understand the nature of the contract before you can be able to explain what's going on.

Absolutely.

I can understand that.

But I hope that summary just re-justified why we want to give you a [view] on it.

But it is in the plan.

It's just finding the time.

And the question on Seroquel?

Yes, I was just trying to find the -- I think the pricing on Seroquel has been quite modest.

I think undoubtedly the prescription growth has been coming down, partly because the high levels of growth can't be sustained and, atypicals in schizophrenia are used now quite widely.

I think market growth will come from expansion of broader indications, whether it's bipolar mania, bipolar depression and the other areas that they're in.

But I can't --

Jon?

Yes?

This is Ed.

We have the data to hand. 12 months ending August, the atypical market, we've got 0 to 6% prescription growth.

Over the latest quarter that's about -- it's maybe eased off 5 or 5.5.

So it hasn't been a marked deceleration.

But I think you're right, the trend being that there is less headroom of cannibalizing the older agents in the U.S., which is probably why you see the faster growth rate rest of the world for Seroquel than you do in the U.S.

But that said, our prescription growth rate for Seroquel is still 0 to 20%.

Thanks very much.

Yes, thank Ed.

Next question, which I believe is the last.

We take our final question from Jo Walton of Lehman Brothers.

Thank you.

You talk about asset write offs or provisions for doing more restructuring.

I wonder if you could tell us, broadly speaking, what the ongoing level of restructuring is.

Presumably moving to electronic capture and things like that there is an ongoing low level, perhaps, of expense that you have been experiencing.

And is that a level that you would expect to continue or are you just signaling that there could be a spike up in that?

And secondly and sort of related, you must have people joining and leaving your firm.

Do you get a feeling that you are doing a lot of this cost control better than others?

I'm sure a number of us on the call have sat through presentations on how it's cheaper to get people from India and lots and lots of data.

So what you're saying other companies are also saying.

Are you just putting it together better than others?

I would certainly like to think that we are.

And maybe we've had longer to do it.

We get mixed -- we get different messages depending on where we recruit people from.

I think we do get favorable responses from people that we recruit from the industry.

I have to say, we also get comments from people that we recruit from outside of our industry who say well, you've still got some way to go.

So I think we're doing pretty well in the context of the industry.

But I think in terms of how this industry is responding vis-à-vis other industries, I think there's still scope for doing better.

And also we've got to be very -- we've got to be very careful with this as well in that it's one thing to improve efficiency.

Ultimately we have to be responsible for creating and environment where people feel free and happy and motivated to innovate, because ultimately that's what this industry is about.

And I can assure you that we will not get these programs out of sync from what it is necessary to create an organization, and atmosphere and culture that it stimulates innovation.

To your first question, there is an ongoing cost of this in whether it's an investment in IT programs or whatever that we would regard as business as usual.

Occasionally it might involve exiting assets that could have a slightly lumpier one-off charge and that's really all I was really suggesting, that there could be something in the fourth quarter of a few cents, not dramatic, that could happen this quarter, depending on how things progress.

So it's really just alerting to you to occasionally there could be a little lumpiness in it.

But otherwise, the cost to achieve future benefits we take as part of managing the ongoing business.

And I would not be encouraging you to strip it out.

What sort of level of expense is it?

Is it 100m a year or less than that?

Yes, it's probably 50 to 100m, something of that order.

And one final question, if I could please, you've talked about having fewer salesmen in the U.S. and having reduced your two contract sales forces.

If we look at it now versus a year ago, what sort of percentage reduction in, let's say, full time equivalents would that be?

And is that more than offset by spending money more efficiently in other ways?

It's not actually a reduction in your promotional expense, it's just that you've shifted it from people to other things?

Ed, I don't know if you've got the numbers.

But it is absolutely not a reduction in our competitive capacity when you take account of all of the elements of promotion as I've described.

But the fact is, and I used this statistic last quarter, we're getting something like 30%-odd more detail out of our sales force.

And that has to -- that has to result in more efficient way of promoting.

And that's why we've been able to let the contract sales forces go without feeling that it's in detriment.

And I'm not making a grand statement about what the structure -- this future structure of the industry is going to be and where sales forces are going forward.

Sales forces will always be an important part of the promotional mix, but that doesn't mean to say that we won't continually look to look for ways of using those resources more efficiently and effectively.

Ed, do you have the numbers?

I think year over year, Jon, I think the reduction in the contract sales force was in the order of 400 or 500 reps.

And we still have a footprint of around 6,000 or so.

Thank you very much.

Thank you, Jo.

Well if there are no more questions, can I just say once again, thank you very much to you all for joining our conference call this afternoon.

If there are more questions or follow-up questions that you have, please contact Investor Relations.

And once again, thank you very much and good afternoon.

Thank you for your participation in today's conference.

This call has now ended.

You may disconnect.