AstraZeneca PLC (AZN) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to today's AstraZeneca analysts' conference call. For your information, this conference is being recorded. At this time, I would like to turn the call over to your host today, Mr. Jonathan Hunt. Please go ahead, sir.

Thank you, Operator, and welcome, ladies and gentlemen. Here with me in New York is David Brennan, Chief Executive of AstraZeneca, and Jon Symonds, Chief Financial Officer. Joining the call today by telephone from Cambridge is Dr. John Patterson, Executive Director of Development for AstraZeneca, and also joining by phone from their headquarters in Maryland is David Mott, CEO of MedImmune.

Before I hand over to David, I'd like to read the following statement. The companies intend to utilize the Safe Harbor provisions of the United States Private Securities Litigation Reform Act of 1995. Participants on this call may make forward-looking statements with respect to the operations and financial performance of AstraZeneca and MedImmune. 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 companies undertake no obligation to update forward-looking statements.

I will now turn the call over to David Brennan, AstraZeneca's Chief Executive. David.

Thank you, Jonathan, and good morning, everyone. We really appreciate you joining us for this call this morning. It's a very important day in the strategic evolution of AstraZeneca. And this morning, we will discuss our announcement of the agreement to acquire MedImmune. And as Jonathan said, I'm pleased that David Mott, the CEO of MedImmune, is on the call with us and will be available to answer questions after we finish our remarks.

We also, as you will have seen, released our first quarter results and Jon Symonds will certainly take you through the highlights of those as well, and then we will be prepared to discuss any questions you might have. After my remarks, you'll also hear from John Patterson, who's the Head of Development. And, as I said, Jon, who, aside from those comments about the financial aspects of this transaction, will cover other news that we released this morning. So there's plenty to talk about, to say the least.

As you all know, strengthening the pipeline has been our highest priority for some time. In addition to increasing our internal R&D budget, the numbers of projects and programs, as you know, we've also acquired companies and licensed in products and technologies that complement our disease area strategies.

In May of last year, with the acquisition of Cambridge Antibody Technologies, AstraZeneca took a significant step towards implementing an important strategic decision we had made to introduce a biologics strategy alongside our existing strengths and capabilities in pharmaceutical R&D. It was a significant step and I believe it's really positioned us well to move forward with the announcement that we made today with the acquisition of MedImmune. We have taken very decisive action to significantly accelerate delivery of this biologics strategy.

Together, MedImmune and AstraZeneca create a leading biologics business. We'll have critical mass in all the necessary functions - discovery, development, regulatory and manufacturing - and we'll have significant global sales and marketing reach for all of our products. This business combination strengthens our pipeline today and it offers more potential and new technology and new capabilities to improve our product flow over the long term.

It diversifies and enhances our R&D capabilities, expanding in scope to cover small molecules, biologics and, for the first time for AstraZeneca, vaccines. It will also allow us to expand our licensing and business development activities into areas where we previously did not have the technical platforms and expertise to go. And it enhances our growth prospects; MedImmune today is a profitable, high-quality business that's entering a growth phase.

On a cash earnings per share basis, the acquisition is earnings-enhancing beginning in 2009.

The terms of the transaction in a snapshot are as follows. It's a fully-recommended all-cash offer at $58 per share and the total enterprise value of the transaction is $15.2b. This transaction has been unanimously approved by the Boards of both AstraZeneca and MedImmune and we expect that the transaction will close in June of this year.

Now, about MedImmune. It's very familiar, obviously, to those investors who know the biotechnology sector. But, for those of you in the audience that don't know it, MedImmune is one of the world's leading players in biopharmaceuticals. It's ranked among the top 10 by equity value. Revenues in 2006 were $1.3b, generated from three marketed products, including the blockbuster product Synagis, which is used to prevent respiratory syncytial virus in infants. MedImmune brings with it a significant pipeline in its own right; 45 projects are in development. And, just as importantly, it aligns very closely with our existing disease areas of infection, oncology and respiratory and inflammation.

Now, to discuss MedImmune's pipeline and, more importantly, why we are so excited about how MedImmune strengthens our science and technology base and makes a step change in our biologics strategy, as I said before, I'd like to hand over to John Patterson so he can take you through more details about that. John.

Thank you, David, and good morning, good afternoon, everybody. Just before I describe what this deal brings, can I just echo what you've just heard from David? MedImmune really brings all the pieces of the biologicals jigsaw together for us overnight, with high-quality people and a vaccines capability that will give us the ability to attack disease targets with small molecules, large molecules and vaccines. And it really dramatically increases our ability to take the latter two through to the marketplace.

In addition, MedImmune has a proven track record of identifying new targets and new technologies and gaining access to them. The $300m in-house venture fund, MedImmune Ventures, is part of their proven ability to find and partner in that field. With the acquisition of CAT, we embarked on a significant journey to build a world-class biopharmaceuticals business, with the ability to deliver on the development, scale-up and production of antibodies from discovery through to BLA. MedImmune really gives us that capability to undertake that journey faster and, of course, with much better confidence.

In addition, their capabilities in vaccine production are purely additive and bring us possibilities to create vaccines against infections and other diseases. MedImmune's skill and experience in the field of pediatric therapeutics development is another additional capability that is gained through this acquisition. And it's an area where there is considerable unmet demand from patients, doctors and regulators.

All companies that are in or entering the biologics field are scrambling to secure manufacturing capacity for both clinical development and commercial supply. MedImmune has invested heavily in this area in recent years, with a planned capacity of over 30,000 liters by 2010. With modest additional investment, total capacity could be readily scaled up to over 60,000 liters, securing our requirements for the foreseeable future and avoiding the need for major near-term greenfield investments.

Within R&D, we intend to find synergies between our approaches to target diseases and look to apply the best of the three technologies now available to us to create the next generation of medicines. We'll also be able to use these new capacities and capabilities to continue our strategic and tactical approach to external sourcing of medicines, but with the added advantage of being able to consider late-phase biologicals and vaccines through a team who both know the fields and have access to the technologies.

However, this move also already strengthens our pipeline, particularly in cancer, infection, respiratory and inflammatory disease, where there is therapeutic congruence with MedImmune's significant pediatric infectious disease expertise as an addition to our capabilities.

The alliance brings a further 12 clinical phase projects, split between MedImmune antibodies and vaccines. The two that are most mature are Numax, which is a new improved monoclonal antibody to respiratory syncytial virus, and a reformulated influenza vaccine FluMist, already approved with an anticipated launch in time for the next flu season. In addition, there's an ongoing review of a regulatory supplement to significantly increase the age range for use in children below five years.

Turning now to the pipeline, you will recall this slide that I showed at our annual results conference in February. It showed the 120 total number of projects in the AstraZeneca pipeline by phase of development at that time. On this next slide, you can see the dramatic effect of adding in the 45 MedImmune projects, taking the total pipeline to 163. Amongst the phase I projects, clinical efficacy data exists already in one case, showing real promise in the intended disease area. You'll note that we've not, at this stage, combined the preclinical pipelines, as the two companies use different definitions for early projects, so we've simply put them alongside one another, but you can see the increase in size is clear.

We've previously stated our ambition to have up to 25% of projects approaching late phase development as biologicals by 2010. This slide shows the combined pipeline, split simply into small molecules and biologicals. The transformation is clear. We will have 27% of our total portfolio from biologicals immediately, a rise from 7% prior to this deal. And we're now well on track to deliver our promise, as well as creating the in-house capability to take products all the way through to BLA and into the marketplace.

In summary, there are enormous benefits to our research and development pipeline and capabilities resulting from this deal. Numax and FluMist represent products with near-term sales potential. Our pipeline and biologicals capabilities are dramatically increased, with some very exciting projects, and we can now deliver on the targets we set at the time of the CAT acquisition. Finally, our ability to bring new medicines to patients and doctors is significantly enhanced by the combination of the three technologies, as we set out to deliver the medicines that our society needs.

I'd now like to hand over to Jon Symonds to take you through the financials. Jon.

Thank you, John, and good morning, everyone. I know this call is predominantly about the MedImmune acquisition, but I do want to make sure that we've reviewed the quarter one results. My primary objective here is to make sure that everyone has a good understanding of how the various moving parts of restructuring costs, amortization write-offs and other one-offs relate to our reported results. I then want to make sure that we're all on the same page as to what is included and excluded in our full year guidance. I'll leave the press release to do most of the talking on the key product highlights.

So let's start with the headline numbers. And at this point, I'm referring to the statutory numbers, that is including Toprol XL. Sales in the first quarter were $7b. That's a 9% increase in constant currency and very much in line with our guidance for the full year. With the dollar weaker compared to quarter one 2006, currency had a 4-percentage-point positive effect on sales. So on a reported basis, the sales increase was 13%. Reported earnings per share were $1.02 in the quarter, and that's a 14% increase in constant exchange rates over last year's $0.90.

In the first quarter, we've taken the first restructuring charge related to the $500m supply chain rationalization program that we announced in February. Cash restructuring costs of $82m were charged to cost of sales this quarter, which had the effect of reducing reported earnings by around $0.04 per share. For the full year, we expect to expense around $250m of the total program cost.

If we now look at sales and earnings per share excluding the U.S. sales of Toprol XL, both from current and prior periods, the shape of the business performance is broadly unchanged. Sales are up 10% in constant exchange rates and earnings per share are up 14% on this basis, from $0.79 per share to $0.89 per share. So Toprol contributed $0.13 of earnings in quarter one. And I'll come back to that number later, when we look at the full year guidance.

So now let's work down the P&L, and I'll try and call out the items that help you separate underlying performance from one-offs. And, again, I'll use the reported amounts for this. Gross margin, at 78.7% of sales, is 1.1 percentage points lower than last year. As well as the $82m in restructuring costs, cost of sales also includes $24m in provisions for fixed assets and supplier commitments relating to the termination of the AGI 1067 collaboration, which we also announced today. Currency and royalty payments also reduced gross margin, partially offsetting an improvement from lower payments to Merck. Taking all these factors into account, the underlying gross margin for the quarter actually increased by 0.7 percentage points to a little above the target rate of 80%.

R&D expense, at $1.17b, was up 36% on a reported basis, or 26% in constant exchange rates. R&D activity levels are higher, including consolidating the R&D spend at CAT, as well as the incremental spend on the Bristol-Myers diabetes programs. But also in the quarter there are intangible impairment provisions that total $69m, in conjunction with the end of the AGI collaboration as well as the close-down of the Avanir collaboration on reverse cholesterol transport compounds. Both of these provisions were anticipated in the $300m impairment exposure I talked about at the beginning of the year.

SG&A is pretty straightforward. Spend is flat in CER terms versus the first quarter last year. We still anticipate the full year to be in the low single digits.

Other income of $138m was up $61m over the first quarter of 2006. We did see the expected reduction in royalty income, but in the quarter we also realized some anticipated insurance recoveries. Back in February, you'll remember that I guided you to other income in the range of one-half to two-thirds of the levels in 2006. My best estimate now is that we'll be a bit ahead of the two-thirds of last year.

The tax rate in the quarter was 31%. And it tends to be a bit lumpy quarter to quarter, but I'm still expecting a 29% tax rate for the full year.

Strong cash flow continues. We generated $1.9b in free cash flow in the quarter. Cash distributions to shareholders in the quarter totaled just over $3b, net share repurchases of $1.1b and a dividend payment of nearly $1.9b. We're still aiming for a net share buyback for the year of $4b.

So, after unpicking all of the moving parts, this represents a good start for the year and we believe we're on track to meet our targets and reaffirm our earnings guidance. You'll remember our earnings target range of $3.80 to $4.05 was constructed on an ex-Toprol XL basis, with sales and earnings from Toprol XL excluded from both current and prior-year periods. In addition, this range did not include any one-off costs associated with the productivity initiatives.

This means our underlying guidance has not changed, but we obviously have some Toprol sales and restructuring costs in the books for quarter one. So, adjusting the range for the $0.13 contribution from Toprol and the $0.04 restructuring charges, this equates to an adjusted range of $3.89 to $4.14. Just to be perfectly clear, there's no future Toprol earnings or restructuring costs included in this.

That said, we've also given you some basis for making your own estimates for these impacts. With the current situation of generic solely on the 25mg dose, the run rate for the Toprol contribution remains at around $100m per month. And we've also said that we anticipate the supply chain charges to amount to $250m in 2007.

Before turning to MedImmune, I just want to make a couple of quick comments on the key product highlights. The five key growth brands grew combined sales by 17% in the first quarter. And within that group, Nexium sales were up 8%, in line with our guidance of single-digit growth this year. Sales in the U.S. were up 9%, broadly in line with the trend of dispensed tablets. Germany remains a drag on the Rest of the World performance, where sales were up by 5%.

Crestor sales were up by 59%, with sales in the U.S. up 56%. Crestor prescription growth, at 46%, was well ahead of the 11% growth in the statin market. But there's no doubt that the strong growth in simvastatin, with the new generic entries as well as the change in planned formularies from the beginning of the year, it's a strong head -- it represents a strong headwind for the branded products in terms of market share progress, as you've seen in recent weeks. But it's Lipitor that appears to be taking most of the brunt of this. The METEOR data was well-received at ACC and the atherosclerosis submissions are well under review in the U.S. and in Europe.

Seroquel was up 13% in the quarter. U.S. prescriptions are up 12% and market share in the U.S. is up to 31% in March. That's half a point higher than it was in December. We're seeing a really good uptake for bipolar depression, but of course this is at somewhat lower doses than you see for schizophrenia.

Arimidex was up 15%. U.S. prescriptions were up by 11% and its sales growth of 27% includes some de-stocking of inventories in the first quarter of last year.

Finally, Symbicort had another good quarter, with sales up 19% to $354m. And we can now confirm that we expect to launch in the U.S. around the middle of this year.

I'll leave it at this. There's clearly a bit of complexity to the numbers in the first quarter but, underlying, it's a good start to the year and we're on track to meet our full year targets.

This brings me to the MedImmune acquisition. David and John have already explained why we are so excited by this acquisition, so I'll stick to the cold facts for now. At the agreed price of $58 per share, the total enterprise value is $15.2b. We intend to finance the acquisition entirely by cash, through a $15b bridging finance facility, supplemented by cash from our own resources. It's our intention to refinance this as soon as possible, with a package of debt that spans various maturities.

This will leave AstraZeneca with permanent debt. We've said for some time that we expect to be geared and would achieve it via a transaction that enhances our long-term prospects, rather than through financial engineering. That's exactly what we've done today. As I've also said previously, the Board has confirmed its commitment to the 2007 buyback target of $4b in 2007. And additionally, there will be no change to our stated dividend policy.

So let's now turn to the impact MedImmune will have on our financial position. To keep it simple, let's assess what MedImmune brings. Well, first and foremost, it's a leap from being an embryonic biological business founded on CAT to a world-class biological business that's fully integrated from discovery to the patient. The AZ biological build would have required investment in people, investment in capability, as well as significant investment in manufacturing facilities. All of this can now be avoided, bringing substantial financial synergies, as well as significantly reduced execution risk.

Secondly, as David has already mentioned, MedImmune is poised for a period of growth, with the launch of Numax and the reformulated FluMist on top of the Synagis performance and the HPV royalties. Consensus sales growth through to 2010 is for a CAGR of a little over 12%, so it fits in perfectly with our stated ambition of growing in line with the market over the same period to the end of the decade. Further, these revenue streams are robust, with lower generic risk, and this dampens some of the small molecule risk we have into the next decade.

Thirdly, we have the opportunity to utilize our outstanding sales and marketing capabilities in the U.S. to support and help drive the existing MedImmune sales force, as well as now having the ability to launch the future range of MedImmune products through our own extensive international network.

So, taking all of these facts together, we believe the acquisition will be accretive to cash earnings per share from 2009 through the inherent quality of the business and our ability to deliver synergies in sales and marketing improvements. We believe that the synergy potential across all of our related activities could well approach $500m.

When I refer to accretion, I use the term cash EPS. Clearly, there will be a substantial amount of intangible assets and consequently a substantial amortization charge. Although the accounting exercise will take some time to complete, our working assumption is that amortization would be in the order of $750m per annum or so. Clearly, we will give you a much better view on this when we have it.

Over and above this, MedImmune delivers on AstraZeneca's ambition to be one of the leading biological companies, a reality now, and at substantially reduced risk. This acquisition is entirely consistent with our strategy of making biologicals a significant part of our business, improving the breadth and depth of our pipeline, while introducing new skills and technologies, generating strong financial returns and utilizing our financial resources for the long-term benefit of shareholders.

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

Thanks, Jon. Just before we do that, I wanted to remind everybody that, as we approach this transaction, we are clearly mindful that, in this industry, it's people that create value. And MedImmune has very talented people in their organization and those people are passionate about making a difference in the lives of patients. We will be making every effort we can to retain the key employees and critical skills that exist there and we expect to be able to maintain the culture that has helped create MedImmune's success. To that end, we'll be offering retention grants to employees in MedImmune.

And the people at MedImmune will enhance AstraZeneca's skills and capabilities in the development and manufacture of biologics, so it's a good fit. Their teams have strong external collaboration and partnering skills, as has been said already on the call, and we're excited about having those kinds of connections into the marketplace in a new and different way. I look forward to having David Mott, the MedImmune CEO, take on a leadership role within AstraZeneca and he will now be a member of my executive team.

In closing, let me say to all of you that this is an important day for AstraZeneca. The combination of AstraZeneca and MedImmune creates a leading fully integrated biologicals business and on an accelerated timeline, as Jon said. It expands our pipeline now and for the future and, by acquiring this profitable, high-quality business with strong growth prospects, we expect it to be enhancing cash earnings per share in 2009.

With that, I want to hand you back to the conference operator, who will give instructions on how we're going to handle the Q&A session. Operator?

Thank you. [OPERATOR INSTRUCTIONS]. We have a question now from John Murphy from Goldman Sachs. Please go ahead, sir.

Yes. Good morning, gentlemen. A few questions, if I could, please. Jon, I know it's early, but I wondered if you could give us any comments at all relating to finance costs or debt pay-down time lines, whether there's any tax benefits at all to be gained here?

And finally, you sold the Humira royalty stream when you did the CAT deal. I wondered if we could expect anything similar, possibly with the HPV royalty stream here.

All right, Jon, over to you.

Okay. Thanks, John. Well, we haven't put the refinancing plan in place. I think, as I said, we will have a mix of maturity, some of which will be out longer and some will be shorter. We clearly want to -- will want to preserve our financial capacity to take further opportunities as they come. This is not the end of our externalization ambitions and, therefore, I think we will see a mix of longer-term debt as well as rapid pay-down of debt at some of the shorter terms.

Right now, we're not -- we're planning some tax benefits from this, but Medimmune is predominantly a U.S.-located organization. And, therefore, the marginal tax rate of Medimmune is somewhat ahead of ours, because it's pretty well fully unsheltered U.S. profits.

On the royalty streams, well, if we get a deal like we did on Humira, you bet we'll look at it. But, as of now, that's for another day.

Right. Thanks very much.

Thank you, John.

Thank you. We've got a question now from Andrew Baum from Morgan Stanley. Please go ahead.

Good morning. It's Andrew Baum. Four questions, if I may. Firstly, on the synergies and the up to $500m, could you perhaps share with us the split between cost reduction and cost avoidance and give us some sense as to where these cost savings and/or revenue synergies are coming from, percentage from Medimmune versus AstraZeneca's current R&D base? Maybe if I just pause there.

All right. Well, let me just make a quick comment and then I'll ask Jon to give a little bit more color to it. Clearly, we see the opportunity across our business to take advantage of where there are overlaps between the companies. And also, as we look now at having three different available ways to drug targets, we think we can be much more critical with our portfolio, looking at ways we really want to go forward. And, thirdly, I think some of this just comes down to also continuing our pretty aggressive program in SG&A.

Jon, you've commented a little bit earlier today about some split between it. I don't know that we're finite in it at this point, but I think you should -- you could give a little bit of color to that.

Yes. Thanks, Andrew. I wish I could tell you that I had a beautifully bottomed-out schedule that said exactly where they were coming for and when. The reality is that we've been working hard at this for a few weeks and -- but nonetheless, the target we've said of up to $500m in three years out from here seems to us to be the right level of ambition.

I'd broadly say that there are three sources and we're absolutely not ruling out the opportunity to achieve sales synergies through the integration of our sales and marketing platforms in the U.S. with the Medimmune sales and marketing capability. But clearly, given that two of the three areas that Medimmune are in, oncology particularly, we're in two. We will be looking for synergies there, although the pediatric sales force of Medimmune is one that did not directly correlate with our own. So that's one area.

The second area is undoubtedly significant benefits of cost avoidance. As was made clear, the CAT journey was at a relatively early stage and we would -- we had an investment program to build development capability, to build regulatory, to build process engineering, etc., etc., which are now largely in the hands of Medimmune. So, some of those investment programs will not now take place.

And, thirdly, the three areas of therapeutic focus of Medimmune in infectious disease, in oncology and respiratory and inflammation, are three areas that we're in as well. And we will clearly want to look at what is the best portfolio that we can produce out of all these three components.

Somebody said to me this morning, well, does that -- would you allocate it a third, a third, a third? That's not an unreasonable split, but I do recognize that as time goes by we'll need to come back to you with a clearer picture. But I think that's probably a fair profile for now.

Now, Andrew, you said you had one more question?

Actually just a couple, if I may. So, firstly on Crestor, given the comments that you said regarding the managed care environment, if I heard correctly, could you give us some sense as to the pressure on rebating, both within your Medicare and commercial book of business, compared to last year? Is that growing and do you expect to continue it to grow?

And then, finally, a very quick one, given Medimmune's early or phase II products, could you give us a sense of how many are in-licensed and what we can read into that about your ability to resize Medimmune's in-house discovery and research capabilities?

Right. Well, I tell you what, I'll comment on the Crestor and ask Jon Symonds to also comment on it, as he just reviewed the U.S. business as well. And then I'll ask David Mott to respond to your question about the Medimmune in-licensing.

Obviously you asked is the pressure increasing in managed care. I think I've said yes to that question each year for the last five years. The -- clearly, the pricing environment in the U.S. across all aspects of the business continues to be pressurized. It seems that it is evolutionary not revolutionary, and it really does just put the pressure on us, not just from a cost perspective but to demonstrate why Crestor is truly a valuable addition to a formulary.

And because of its profile and what it has demonstrated in terms of clinical efficacy, as well as some of the outcomes data that's now emerging, it gets -- we've been able to improve the formulary positioning over last year. And that's not just being driven by bigger rebates on it. It's much -- it's being driven as much by the fact that people want to have an addition to a generic, the best statin possible. The ASTEROID and METEOR data, as you know, have been filed. We are looking forward to hopefully getting additional information from that.

And so, Jon, you've reviewed the U.S. business, do you want to?

No, I think you've captured all the points. I think the profile of Crestor in managed care is very clear. And I think people recognize very clearly the role that it has as a branded medicine. And so, the pressure that's in that segment is less one of price for the branded products, but more one of do you use a generic or do you use a branded product. And it's clear that formularies are trying to much more aggressively stamp the position of Simva in their formularies and, therefore, give that a higher proportion of the first prescription.

But the value proposition, as David's described, for Crestor is very clear. And, therefore, we remain confident that we can continue to carve out a very strong position that will get stronger as the data flows through and we have an opportunity to promote the METEOR data. So, I think we still remain well-positioned.

Good. David, might you want to comment on the impact of the licensing activities at Medimmune and what you think that means for us?

Absolutely. Thanks, David. I think, if you look at our pipeline of early to mid-stage programs, you see really a mix across things developed internally versus things licensed or developed through collaborations. One of the things that Medimmune has prided itself on for our entire 19-year history is being a very good partner. We find that in the biotech industry almost everything involves some form of collaboration, whether it's with an academic lab, another biotech company, a pharmaceutical partner. But we think that that is a very critical skill set to be successful in building products in this area.

With respect to the balance between discovery and applied discovery, or development if you will, within our pipeline and what that might forebode about efficiency and synergy opportunities between Medimmune and existing AstraZeneca assets, I would just point out that really at Medimmune historically we have not done very much, what I would call, greenfield discovery work at all. We are a very product-focused company and go after applying new technological breakthroughs to drug development as fast as we possibly can.

One of the things that we have been impressed with out at CAT over the years, as we have known them, is the tremendous power of their antibody discovery and early molecule development technology. And frankly, I think that is a wonderful fit with Medimmune's biologics drug development capability. And I think combining those organizations has tremendous synergy opportunity for accelerating drug development, bringing more products into the clinic quickly than either company could do on its own. So, there are significant synergy opportunities there.

Good. Thank you, David. Thank you, Andrew. Next question?

Thank you. We've got a question from Graham Parry from Merrill Lynch. Please go ahead.

Thanks for taking my question. The first one just relates to pipeline products. If I look in phase II the two projects, so the Anti-IL9 and the EBV vaccine, do you have any sense of what the time lines are for moving those into phase III and seeing any phase II data? And could you give us an update on what the lead indication would likely be for the Anti-IL9 going into phase III?

The second question's just on the financial aspects. Jon, is it your intention to stay at this level of gearing going forward? You referred to permanent debt. Are you comfortable with this level of net debt or would you prefer to go higher or maybe lower?

And then, thirdly, with the Merck payments next year, what's the impact likely to be on share buybacks? And is it now inconceivable that they would be at the same levels that you've seen for 2007? Thanks.

Okay. Well, why don't we actually start with the financial questions to Jon and then I'll let David Mott come back on and talk specifically about the pipeline activities, as well as timing of potential transitions, phase II to phase III.

Jon, do you want to start with gearing and then talk a little bit about Merck and the cash?

Yes. I don't have -- Graham, I don't have a predetermined level of debt where I'm happy at below it and unhappy above it. I think I want to use the balance sheet to drive opportunity and that's clearly what we have been able to do today. We've been able to move extremely quickly and that's a great position for us to be in.

So, we have still got some additional capacity before I think we hit our limit. And for me the limits are more to do with credit rating than they are to do with absolute amounts. And this deal should keep us still within the AA rating, which would still give us some capacity to move down into A and still be a strong credit, and still be able to say to the Board and the shareholders that we have the financial capacity to both build and defend if we need to.

I think, on the question of share buybacks, particularly, as you say, that we do have an obligation to Merck next year, that's been factored into our forecasts, frankly, for the last five years. And it'll be great to get it behind us and not have to keep talking about it. And so, as we think about refinancing the balance sheet, we'll clearly take into account the likelihood that we've got an obligation of around $3b next year.

Inconceivable at the current levels, probably highly unlikely. I think the Board has got to form its own view as to what the optimal combination of shareholder return and opportunist and flexibility for opportunities. I think it's unlikely that it will be 4, but it's also inconceivable that it will be at zero. And so, this is something that we'll work through during the course of the year.

And we've said all along we would use our cash to try to grow our business longer term as best we can and this is an example of that.

David, do you want to comment on potential transition times for those couple of products and where we're at with them?

Sure. Let me actually take it a little more broadly than just those two programs and point out that we have 15 different projects in the clinic right now at Medimmune. Of those, about 12 are in the phase II-ish stage of drug development. You highlighted two in the question, but frankly I think there's a lot more than that going on that have the potential to move into phase III over the relatively near term.

Of that 12 programs, as we look at our business going forward, we expect that based on standard attrition rates and where they are in stage of development that somewhere in the range of three to five of those projects have the potential to be in phase III by the 2009 and 2010 timeframe. So, three to five moving out of that basket of 12 into pivotal trials in the '09/'10 timeframe.

One of the things that I have just begun to talk about with David Brennan is how, when looked at through an AstraZeneca prism instead of a Medimmune independent company prism, we may be able to select several of these key programs and accelerate their development and broaden it by doing some things in parallel, rather than sequentially. And perhaps there is a different prioritization of which things we go after and at what pace, when looked at through the eyes of AZ than the way Medimmune was looking at it independently. So, there is a very large portfolio of phase IIs that should yield multiple phase III programs in the '09 timeframe.

And perhaps --

Thanks, David.

And would it be possible to get a feel for just the timing of any data that we could see on that? Are we looking at next year before we'll see any proof of concept data on any of these compounds?

No. You'll actually see a very continual stream of phase II clinical data being presented in medical meetings over the course of '07 and '08. There are meetings already scheduled where we've submitted abstracts and papers that are in press right now on many of our phase II programs.

Just recently we presented new data on our Anti-HSP90 program, which is moving very rapidly in oncology development. There is also going to be a bunch of data coming out at some of the rheumatology conferences later this year on our anti-interferon alpha program in lupus patients. We're just now expanding that program also into myositis and psoriasis and are beginning enrolment in a large multi-dose phase II study in lupus patients with that as well. So, there's a very active publication and presentation program that you'll be able to monitor the progress of these candidates with.

Good. Thank you, David. Thank you, Graham. Next question, please.

Thank you. We've got a question from Matthew Eston from Lehman Brothers. Please go ahead.

Good morning, gentlemen. A few questions, if I could, mainly financial. Firstly, Jon, the cost of the deal and the synergies, you've talked about the anticipation of saving up to $500m a year. Could you give us some indication of how much you think that's going to cost to implement and the timing of those one-off charges?

Secondly, can you explain how the options program at Medimmune is going to be dealt with, with the merger? Do all options get paid out? And if so, is that going to lead to an exceptional charge? Again, what magnitude is that likely to be? And what implications do you think that will have for staff retention?

And then, finally, just regarding tax, if I look at consensus models for Medimmune going forward, they seem to have very low tax rates based in -- baked in, in the teens. And clearly you highlighted that the majority of the earnings are going to be U.S. domiciled and are likely to secure or pay full U.S. tax. Can you just explain why those low rates and how I should model that going forward? I think that's a question you already dwelt on earlier, but a little bit more detail would be useful.

Well, Jon, go ahead, why don't you start with synergies and the options program?

Yes.

Tax.

I think we're still at our early stages on the synergy implementation. And, therefore, I can't give you a good feel as to what we think the implementation costs. Because a chunk of it is avoidance, it pretty well comes at no cost. So, our initial gut feel is that you're talking about maybe half of the synergy program coming out as -- in costs, the majority of which would probably fall in 2008.

The existing option programs in Medimmune get -- have been paid out. As David said, retention of Medimmune employees is of paramount importance as we go through. We are looking at new incentive schemes and, although we have a cost number in mind, I'm not comfortable at this point in declaring that until we've really explored it properly with the Medimmune leadership and their employees.

David, you might have to help me on the tax rate, as to why it is in the teens. But I think, going forward, I stand by what we said earlier, that this is a predominantly U.S. income stream. I think we will have some opportunities for locating IP or having the international income streams come via Europe, but I think for now it's largely a U.S. rate.

David, anything you can add to that?

Sure, John, yes. The -- I'm not sure which analysts' reports you might be looking at, but we track all the analysts that have followed Medimmune and look at the consensus expectations on every line item in those models. And typically they're around a 36% long-term tax rate going forward for us. So, I'm not sure where you're finding someone in the teens, but that certainly isn't the consensus of the analysts that follow Medimmune. And that mid 30s, 36%-ish tax rate is consistent with our internal expectations going forward.

And I also agree completely with Jon that there are some opportunities, as we begin to build revenues outside the United States, to capture those revenue dollars ex-U.S. and bring our tax rate down some over time by thinking more as a global company as opposed to a U.S.-centric company.

And as I, in my closing comments, commented about the importance of retention in the people, David, would you like to comment about the spirit of the people at Medimmune? Clearly, you had to make a release 10 days ago or so that something was going on, but I wonder if you'd comment about how people are feeling?

Yes. I'm -- frankly, soon after we get off this call I'm going to go down and do an all-employee meeting here this morning with our staff. And I expect it to be very, very well received. AstraZeneca, I think, is an excellent fit for Medimmune. It gives us greater global resources to continue doing what we love doing and already do very, very well. There are tremendous opportunities for synergy between us and CAT to really maximize what we're good at and what they're good at by working together.

And I think that our employees will readily see that and receive that. And certainly my commitment to be a part of driving the successful combination of Medimmune and AstraZeneca and Jim Young, our Head of R&D's, commitment to do that as well, is a strong signal of how I expect the rest of the employees to respond.

Great. Thank you, David. John Patterson, maybe you just want to comment? You've been leading CAT for the last year and how do you see the fit and the impact on the people from your perspective at CAT as well?

Thanks, David. Well, I'm actually sitting in CAT here this morning as we speak. And obviously the CAT people are interested to see how we can create this biologicals machine that they've been looking to be part of for some time. So, there's a real buzz in terms of doing that. And, as David Mott said earlier, the skills come together brilliantly. The jigsaw fits together, because what Medimmune brings is a skill at search, development and all the scale up required. What CAT brings is a tremendous discovery platform and the skills to actually help us find the targets.

Yes. Well, that's it. And that's why we see the fit being so strong from our perspective because of our position with CAT, as well as the alignment from a disease area and therapy area strategy. And we've had our people together for a couple of weeks and I think it's all been a good fit. So, that had a lot to do with the decision that we made.

We're down to about our last five minutes. Do we -- next question, please?

Thank you. We've got a question from Alexandra Hauber from Bear Stearns. Please go ahead.

Thank you for taking my question. A couple of questions on the transaction. First, a technical question on the numbers of shares you used to derive the total purchase value, including the cash, of $15.6b works out to about 269m shares. And when I look at last Medi's release they were talking about 245m on a fully diluted basis. You mentioned you paid out the options. Could you just shed light, does that account for the gap of the -- in the share numbers?

The second point, on synergies in Numax, is there a change in control clause with Abbott? Or, alternatively, is there any chance you can take back the asset for the European rights for the assets? And is there any difference on how synergies is treated compared to Numax?

Then -- and then I have a question for clarification on a statement you made in the press release this morning. When you talk about the financial benefits, you talk about potential milestones and royalties on Medimmune's other licensed products and $1.5b in cash. Can you just be a bit precise what this $1.5b in cash refers to, because that's obviously -- is that what you calculate -- what you used to calculate the net cash of $340m?

All right. Well, let me take the change in control. There are no change in control issues around this. There's -- Medimmune's had a relationship with Abbott internationally and we have that now and we will take a look at it. I think we can safely say we also have those skills and capabilities. So, we'll take a look and see what we can do to build on that.

Jon, do you want to comment on the --?

The total number of shares, I think, is the difference would be the shares under the convertible debt that clearly are linked to the offer price. If you still can't get it, give us a call and we'll take you through the calculation. The $1.5b is the gross cash and cash equivalents.

Okay.

The 320 is the cash.

Okay.

Good. Thank you. We've got time for one more question.

Hang on a sec, can I just ask a clarification? What about take that, getting the full economics on the -- on synergies Numax, that you can take the distribution rights back? Is there any chance of that or not?

I don't think we're in a position to comment on it. It's not contractual. There is an agreement in place that exists and now that we have it, we will take a look at it and see what we can do.

Okay.

I think that's the answer to the question.

Okay, thank you.

Thank you. We've got time for one more question.

Thank you. We've got a question from [Bolam Ozer] from Sanford Berns. Please go ahead.

Thank you. Just one last question on the one-time retention grant. Would you comment a bit on who that's targeted for, i.e. how deep down into the organization it goes and how long it keeps Medimmune employees there?

Yes. It's a program that will be available to all employees at Medimmune. There will be some different timescales around it, but generally it will be one year at this point. And we will then have our -- additionally, the AstraZeneca programs that we use for all of our employees available as well. So, we'll just transition to those kinds of programs.

Was any component of that in the purchase price?

Well --

Not in the direct calculation but we are anticipating some of that, for sure.

Yes, yes. We included it in our calculation, but it's not in a share price equivalent, no.

Yes.

So --

Okay, thank you.

No, but I think we're optimistic that it will send the message to David's employees about how important we believe they are and how that fits with what we're trying to do, which is to significantly increase our capacity in this area and bring together different parts of a couple of different organizations, CAT, ourselves and Medimmune, to create a leading biotech biologicals business globally. It really does position us very differently from where we have been in the past. And in the mid to long term we can see ourselves with different platforms and in a very different place.

So, I -- we believe it's a very good fit. It's good people. I think the retention programs and the other things we'll put in place will demonstrate that to everyone there.

With that, I think we are out of time, so I'd like to thank everybody for your participation in the call this morning. You know how to get in touch through our Investor Relations group if there are any other questions; please feel free.

Again, thank you all for joining us this morning and have a good day.

That will conclude today's conference, ladies and gentlemen. Thank you for your participation. Have a good day. You may now disconnect.