AstraZeneca PLC (AZN) 2007 Q3 法說會逐字稿

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  • Operator

  • Good day, and welcome to the AstraZeneca Q3 results analysts conference call. Today's conference is being recorded. At this time I would like to turn the conference over to Mr. Jonathan Hunt please go ahead sir.

  • Jonathan Hunt - IRO

  • Thank you, Operator, and welcome, ladies and gentlemen. Chairing today's call is David Brennan, CEO of AstraZeneca. Also on the call is Paul Kenyon, Group Financial Controller and the Investor Relations team.

  • Before I hand over to David, I'd like to read the usual statement. The company intends 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 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 over to David.

  • David Brennan - CEO

  • Great Jonathan. Thank you. And let me add my welcome to all of you as we spend some time here to discuss our third quarter financial performance.

  • Third quarter really reflects continued progress on our key strategic priorities. Our business is on track to meet our full year earnings target, despite some challenging market conditions. The entire organization is getting on with executing our comprehensive plans to drive productivity and efficiency. And we are seeing results from those initiatives.

  • We are continuing to take steps to strengthen the pipeline that is our highest priority. We had two additional compounds progressing to Phase III development in the quarter. That was PN400 and the Crestor Abbott fenofibrate fixed dose combination. That brings the total number of late stage projects to 10.

  • And the breadth and depth of the entire portfolio is stronger now than it's ever been. And our plan to be a major force in biologics is coming to life through the creation of a new MedImmune, where the transition has been underway. The combination of MedImmune, CAT, and the existing AstraZeneca biologics assets, have now positioned us to be a world leader in this area in the future.

  • I will spend the next few minutes giving an overview of the Company's performance in the third quarter, including an update on the key brands. And then Paul Kenyon will flesh out some of the details in the financials. And then we plan on leaving ample time for your questions.

  • So on to the headline numbers. Sales in the third quarter were $7.15b a 10% increase as reported, and a 6% increase on a constant currency basis. We face generic competition across the entire dosage range for Toprol-XL in the U.S. beginning in August. So that's certainly affected the top line performance. Excluding Toprol-XL sales were up 9%, 2% of which came via MedImmune. Sales in the U.S. increased 3% clearly affected by Toprol-XL. Sales in the rest of the world were up 9%.

  • Operating profit for the quarter was down 7% at constant currency. Keep in mind that operating profit was reduced by $146m of restructuring costs and by $212m from the inclusion of MedImmune, as a result of the expected seasonal trading loss, the amortization of intangible assets, and some one-off costs relating to post-acquisition pipeline rationalization.

  • Reported earnings per share at $0.91 are down 13%. Core EPS, which adjust for MedImmune and Merck related amortization and the restructuring costs were down 2%, reflecting as expected, the previously mentioned operating loss in MedImmune, as well as the net interest expense associated with financing the acquisition. Toprol-XL also had an impact.

  • I will read the details of the year to date performance from the press release. All the same factors are at work, with restructuring costs playing a more prominent role in the nine months' figures. But underpinning it all is a determined performance in the underlying business.

  • Now let me turn to the key brands, starting with Nexium. The PPI market certainly meets the definition of challenging. Nexium sales were down 1% in the quarter to just under $1.3b. Outside the U.S., sales were up 3% with strong growth in emerging markets, while setting the coin in Western Europe. Sales in the U.S. were down 3%.

  • In line with our strategy, we continue to grow our market share within the branded PPI segment, but it isn't enough at this stage to offset lower prices in the growth of generic Omeprazole. The fourth quarter will present a difficult year on year comparison, as the benefit from the release of the balance sheet provision, related to TRICARE in the U.S. was realized in the fourth quarter of 2006. That provision was around $100m, of which about half was related to Nexium. So at this point we are anticipating that worldwide sales for Nexium may be slightly down for the full year.

  • Crestor sales increased 25% to $691m. Sales in the U.S. were up 14% to $342m. Prescriptions in the U.S. statin market grew by 7% versus the third quarter last year. Crestor prescriptions were up 15%. Market share is holding steady at 8.6% of total scripts in September in the face of nearly a 6.5 share point gain for generic Simvastatin.

  • We had a strong performance in markets outside the U.S. with sales up 40%. These markets now account for half of Crestor sales, and are a continuing source of growth for the brand. As you can see in the press release, we are now over 20% share by volume in Canada and in Italy, and almost 15% in France. Japan is already over a 7% share.

  • Arimidex sales were up 7% to $425m, on a 7% growth in the U.S. and 8% in the rest of the world.

  • With Seroquel, we had our first $1b quarter, with sales up 22%. Seroquel prescriptions in the U.S. are up 10% through September year to date, twice the market growth. Sales in the U.S. were up 24% in the quarter to $760m. This includes around $80m in launch stocks for the new Seroquel XR dosage form. The full promotional roll out for XR began August 20. We are already well placed on formularies in Medicaid, Medicare and in commercial managed care.

  • Our strategy is to use Seroquel XR to continue the growth of the total franchise. It is not to drive an accelerated switch of established patients from the immediate released product to the sustained release regimen. But one thing, Seroquel XR is only labeled for the schizophrenia indication. And whilst some of these patients will switch, of course, for others the continuity of remaining on a stable two or three times a day regimen, that's already working, may be more important to them and their care givers than the convenience of once-a-day dosing.

  • So keep this in mind when comparing the launch of Seroquel XR with sustained released launches in other therapeutic categories, many of which were launched shortly ahead of looming patent expiries. These will have limited utility as benchmarks, as we track progress against our plans for Seroquel XR and the entire Seroquel franchise.

  • We aim to make Seroquel XR the preferred choice for new patient starts in schizophrenia, and then really drive the growth as we build out the full compliment of indications for XR, that the IR formulation currently enjoys, including bipolar mania and depression, as well as entirely new indications in major depressions and generalized anxiety disorder that will be unique to the XR formulation. As a result, over time, Seroquel XR should become a large portion of the total and bigger Seroquel franchise.

  • And lastly Symbicort. Sales in the quarter increased 25% to $371m. In Europe Symbicort's growth has been fueled by increased usage in COPD, as well as market share gains in asthma, where the Symbicort SMART regimen is having a positive impact.

  • We launched Symbicort in the U.S. at the end of June to specialists, and a month later to the primary care segment of the market. This is some two months before the normal seasonal uptick in asthma prescriptions beings. That said the launch is progressing to plan. Some of the early indicators that tell us we are on track, include the rate of trial and usage by specialists. For example, among our target audience of allergists one half have already prescribed Symbicort, and a third of pulmonary specialists have also done so. New prescription share is already 10% among these specialist prescribers.

  • In the market as a whole Symbicort's share of patients newly started on fixed combination treatment was 9.8% in the latest week, translating into an overall new prescription share of 4.6%. So for Symbicort a good performance in the rest of world, combined with the U.S. launch that is on track.

  • I think I will leave it there for now, and let Paul Kenyon pick up some of the details on the P&L for the quarter, including the impacts of restructuring in MedImmune. And he can flesh out our latest thinking for the outlook for the rest of the year, which as I said at the outset is on track to deliver on our full year target EPS, Paul.

  • Paul Kenyon - Group Financial Controller

  • Thank you, David. I shall now go through the third quarter P&L, highlighting the key performance drivers. Give a brief overview of the developments of our capital structure and debt financing, and conclude by reviewing the full year guidance. David has already covered the key drivers underpinning the 6% sales growth for the quarter, so I will not repeat that.

  • Reported gross margin at 79.8% of sales is 1.3% points higher than last year. During the quarter the inclusion of the restructuring costs for MedImmune and higher royalty payments depressed margins, whilst currency and lower contingent payments to Merck had a positive impact. If one strips out all of those impacts underlying gross margin improves by 0.5% on the back of continuing operational efficiencies.

  • Research and development expenditures increased 32% in constant currency during the quarter. Excluding restructuring costs and the inclusion of MedImmune, the underlying increase is 14%.

  • Selling, general and administration costs increased by 10% versus the third quarter last year in constant currency terms. On a like for like basis, stripping out restructuring costs in MedImmune, SG&A costs were 3% lower than Q3 last year, on the back of continued cost disciplines.

  • Operating profit, as David has already indicated, was down 7% in the quarter. Reported profits were impacted by a $212m operating loss in MedImmune, reflecting the expected seasonality as well as the previously communicated acquisition related amortization and one-off charges resulting from post-acquisition pipeline rationalization. Restructuring costs of $146m also depressed reported operating profit. Stripping out both of those impacts would result in operating profit growth of 10%.

  • Reported operating margin was 28.3% of sales for the quarter. Stripping out the aforementioned impact of MedImmune and restructuring would result in an operating margin of 34%, an underlying improvement over last year of 1.7%, as gross margin improvements and disciplined SG&A cost management more than offset the increased investment behind R&D.

  • Turning to currency. In the third quarter the dollar was weaker on average against our principal currencies compared with Q3 of last year. The positive 4% impact on the sales line drops to a $0.02 per share benefit to EPS for the quarter, and brings the year to date impacts to plus $0.05 in earnings. If exchange rates remain as they are for the balance of the year, we would expect no further impact in Q4.

  • As promised at our half year results, we have provided a bridge from reported EPS to core EPS for the first quarter and the nine month performance. As a reminder we have defined core EPS to exclude certain significant items such as amortization of intangible assets from corporate acquisitions and those related to the Merck arrangements, as well as charges and provisions related to restructuring in synergy programs.

  • On this basis core EPS in the quarter was $1.04 a 13%, an upward adjustment to reported EPS of $0.91. This compares to a core EPS of $1.03 in the third quarter 2006. The press release provides the details of these adjustments for the quarter as well as the year to date figures.

  • Turning now to the capital structure of the business. At the half year we outlined the Board's financial policy and priorities for the deployment of cash flow following the acquisition of MedImmune. A key element of that strategy was the refinancing of short term debt, and during the third quarter we completed a placement of $7.9b with maturities ranging from two to 30 years.

  • This, coupled with the pre-existing long term debt of $1b, means that our commercial paper program has been substantially reduced during the quarter, and at the end of Q3 stood at around $5.3b.

  • To help you with your modeling, we would estimate that the weighted average interest rate on the entire gross debt portfolio of $14.3b is currently around 5.7%. Of that gross debt 40% is fixed rate and 60% is floating.

  • Free cash flow before acquisitions was $3.6b for the nine months. Cash distributions to shareholders were $5.8b, including net share repurchases of $3.1b. We remain on track to deliver the previously committed net share buyback of $4b for the full year.

  • I will conclude with a review of our guidance for the full year. As David said at the outset, we are on track to deliver our earnings targets for the year as communicated at the half year results announcement. That is earnings per share in the range of $3.60 to $3.75 excluding the contribution from the U.S. Toprol-XL business and restructuring costs.

  • Today, we can eliminate another of the moving parts in our guidance. Following generic launch in August across the three remaining strengths of Toprol-XL, we are able to predict the performance of that business with a greater degree of certainty. And now estimate a full year earnings contribution from Toprol-XL in the U.S. of approximately $0.38 per share. This, added to the existing guidance, gives an updated range of between $3.98 and $4.13 for the full year, excluding only restructuring costs.

  • Turning to restructuring costs we are still anticipating a charge of around $900m for the full year or $0.44 per share. But the precise amount recognized in the 2007 accounts, is subject to the successful conclusion of employee consultation processes. Although it's fair to say that we don't anticipate a significant deviation from that forecast.

  • On a related point the accounting charges associated with implementing the synergies from the MedImmune acquisition, will mainly be a 2008 event with little impact to this years' figures.

  • So, in summary, disciplined management of cost is allowing us to invest incrementally in R&D whilst delivering our earnings targets for the full year.

  • And with that, I will hand back to David.

  • David Brennan - CEO

  • Thank you Paul. And before we go on to the Q&A session I just want to make sure that you've all noted the change in the date for the Biologics Day that we will be holding at MedImmune in the U.S. in Gaithersburg, Maryland in December. With both BMS and Lilly holding investor events that week we've moved the date from December 6, to Friday December 7 in response to your feedback.

  • The day will be a new format for us. It will allow an in-depth review of the new MedImmune's science. As I mentioned it brings together Cambridge Antibody Technology, the AstraZeneca Biologics, the work we have been doing with Abgenics, so you get a picture of all of that. We will also talk about capabilities and discovery development in manufacturing for our biologics business as well. And we will cover the biologics pipeline.

  • We will also plan, in the future, to hold other topic specific days, as I think this type of format allows for a more in-depth review of some of the key areas for our business. So that will be the format we will use going forward, and we will start it with the Biologics Day at MedImmune in December 7.

  • With that, operator would you please instruct everyone how to signal if they want to ask questions, and we will get started with the Q&A session? Thank you.

  • Operator

  • Thank you. (OPERATOR INSTRUCTIONS). Our first question will come from Miss. Alexandra Hauber with Bear Stearns, please go ahead.

  • Alexandra Hauber - Analyst

  • Good afternoon. I have four questions please. David, could you please speak a bit to the dynamics in the U.S. statin market? What do you need to do going forward to win the battle for improving market share again? Is it a question of access? Is it a question of convincing doctors not to prescribe generic Simvastatin? Is it is a question of the patients in the co-pay?

  • And along -- could you also just mention how a chain and label enhancement with the Atheroma sclerosis label, which we will learn next week, would fit into that picture?

  • And second question, since we have differing dynamics for Nexium outside the U.S. in the different regions, any chance you can give us a rough split of the size of Western Europe versus the rest of the world?

  • And then the third question, is at the second quarter results David you were still confident that you can grow the business in the near term in the next three years, in line with the world market. In view of the definitely challenging environment on the PPI and statin market, are you still confident you can do this?

  • And then the fourth question is a very tiny technical question. In view of the considerable Seroquel products launch stock, well investors sales to a [hockey stick] in the next few weeks which based on your -- what you described I wouldn't expect. Is there any risk that you have to consider negative sales in the fourth quarter for that, for the XR version?

  • David Brennan - CEO

  • Okay. Well let me start with your question about the U.S. statin market and what our position is. Clearly the market itself has been significantly impacted by the introduction of generic Simvastatin. You see it in, as I said, the loss of share for Lipitor and the share gain for generic Simvastatin. The -- and then Vytorin and Crestor have essentially stayed relatively flat.

  • So our goal is to get back to growth. First thing we look at is promotion our share of voice in the market is competitive with Lipitor, and just a little bit behind Vytorin. But they are the only three products that are being promoted. So I think we've been -- stayed very competitive from a share of voice and sampling perspective, which are a couple of the metrics that we can pick up from the market to see how that's doing.

  • I think the messaging will change a bit depending on the outcome of the labeling discussion around the Atheroma label. We expect to have results around that discussion in November. The date for review is coming up relatively quickly. So until we know what that is it's difficult to say. But I think we believe that the -- we want to continue to demonstrate through our outcomes trials and in anything we can get in the label. That lowering LDL more effectively has a significant benefit in morbidity and mortality, and we want to continue to differentiate based on the efficacy profile Crestor has in the market.

  • You mentioned patient co-pays. I think there are a number of dynamics. Co-pay is another one that tends to be driving the uptick of generics. A number of managed care companies have foregone co-pays for generic Simvastatin. So there has been encouragement to move first to the generics.

  • We tried to position Crestor as a product not necessarily to compete for first line treatment when the generic works, but rather for more complicated patients who have a number of additional risk factors, or have just significantly higher cholesterol right from the get go. That message plays well. Our share with cardiologists is higher than it is with primary care physicians, which is an indicator that with the more serious treated -- more seriously treated patients, and in cardiologists we do a bit better.

  • So we are focused on getting back to growth. And I think some of that has to come as the generic dynamic gets worked out and we are able to differentiate on the label.

  • I don't know the exact split between Nexium and rest of the world versus the U.S. but I will ask Ed Seage to comment on that.

  • Ed Seage - USA IR

  • Yes. U.S. has about 65% of the year to date figures for Nexium, and Western Europe is about 20% of the portfolio.

  • David Brennan - CEO

  • Okay. Thanks Ed. And the PPI market in general. I think you asked about growth, we have said that we think Nexium will -- it's likely that it will be negative for the year. Obviously it will depend on outcome. For the fourth quarter it could be slightly negative.

  • We haven't changed our sales guidance overall. Our guidance has been that we thought we would grow at the rate the market would grow. So I think we are going to stick with that. We said upper single digit's was what we thought this year would be. There is a few numbers around there. So, -- so it has slowed down a bit as have the market. So I think going forward we will continue to stay focused on the market growth.

  • Paul, do you want to comment on that in anyway?

  • Paul Kenyon - Group Financial Controller

  • Just a reminder that the guidance we issued was from 2005 to 2010 that [RCA] would be in line with the market that means (inaudible) said.

  • David Brennan - CEO

  • Okay, good. And then on the Seroquel XR launch the stocking really reflects what it takes to reach over 45,000 retail pharmacies with three different dosage strengths of a product. That is relatively expensive. So, a bottle of it is close to probably $500. So just when we do that across three dosages, and get it into all the pharmacies it just -- it's a high total. I think our expectation on uptick, well our expectation on stocking is consistent with the way we normally go about doing this, which is the number of bottles that actually go into the pharmacy. We did nothing different with Seroquel XR than we've done with anything else.

  • Alexandra Hauber - Analyst

  • Okay. Thank you.

  • David Brennan - CEO

  • Next question.

  • Operator

  • Our next question comes from Mr. Mark Purcell from Deutsche Bank please go ahead sir.

  • Mark Purcell - Analyst

  • Yes. Thanks very much. Good afternoon everyone. A couple of questions. Firstly on other operating income appears very strong in the third quarter at $197m contribution. Can you comment on some of the component parts there, and whether any of them are nonrecurring?

  • Secondly, could you help us to understand which products you feel are going to facing Phase III go or no-go decisions in 2008?

  • Third, on Seroquel given that a number of aspects to the Seroquel patent litigation case mirrored at Zyprexa case, and given recent concessions in your favor, do you believe Terra is most likely to seek a settlement in this case?

  • And then lastly on OTC Prilosec [Perrago] are looking to launch at the end of Q1 next year. Could you provide us details of the Dexcel settlement terms? And if not, at least an update on OTC Prilosec sales and capacity at the moment, thanks.

  • David Brennan - CEO

  • Okay Mark. Well, why don't I ask Paul to go ahead and comment about the other operating income are, whether those things are recurring, what the incidences where. There were a couple of moving parts in there from earlier this year, and for the quarter. Paul you can go ahead and pick that one up.

  • Paul Kenyon - Group Financial Controller

  • The main mover in the quarter as you have all now doubt have picked up from our press release on page eight is the inclusion of MedImmune. And that is strong on the back of HPV royalties, which we foresee continuing. So, essentially it's just the addition of MedImmune this time on the back of HPV royalties.

  • Mark Purcell - Analyst

  • Paul could you just sketch out those royalties, and if there are any one-off payments associated with product approvals on (inaudible).

  • Paul Kenyon - Group Financial Controller

  • There aren't any one-off's that I am aware of. But we can do a detailed analysis and come back to you if that helps?

  • Jonathan Hunt - IRO

  • Yes Mark just to comment on that. Its Jonathan. We actually haven't guided on the structure of those payments. And I think this is something that contractually it's not going into the public domain. So we maybe won't be able to give you the amount of -- some of the insight into the moving parts you would want. But you are right in looking at other operating income. That's a key bit to look at both the performance from Merck and Glaxo.

  • David Brennan - CEO

  • And on the, Phase III, Mark, I am not going to get into specifics around that. I think it's a good question for John Patterson to cover, and quite frankly some of those have to hit milestones before they hit the next milestone for go, no-go in Phase III. So it's hard to give the list. I think you can look at some of the later stage programs in the Phase IIb category and, depending on how long those programs need to run, we hope to have a handful to deal with next year if not more.

  • Regarding the Seroquel situation you asked is it likely to settle? We -- Terra lost the structural obviousness argument, and they challenged both Zyprexa and (inaudible) have not succeeded. And it's the same kind of challenge against Seroquel. We have said all along we believe that our intellectual property on Seroquel is sound and expect to demonstrate that. And we will vigorously defend that patent with every opportunity that we get. And we are not looking to settle anything.

  • And on Prilosec OTC I think that's a Proctor and Gamble question. I don't have available the amount of products that they are buying from us. But quite frankly that is really our relationship with them. The -- it's a classic supply arrangement. And they are the ones who will be dealing with the introduction of additional products in the markets. So I will pass on that one.

  • Mark Purcell - Analyst

  • Okay thanks very much.

  • David Brennan - CEO

  • Thanks Mark. Next question please.

  • Operator

  • We will take our next question from Mr. Paul Mann from Morgan Stanley, please go ahead sir.

  • Paul Mann - Analyst

  • Hi there. Just a quick question, well two quick questions actually. Just staying with other operating income the consensus is -- it looks like the consensus you sent out the other day is it's broadly flat about $500m, and I know you are not going to comment on the royalty rate. But if the consensus guidance and the service forecast are correct is that -- is it possible that line could exceed $1b at some point? So that's my first question.

  • Second one just on Seroquel XR, when you think about the dollar value of Seroquel and the dollar value per indication, taking into account the duration of treatment, the dose and I suppose the patient population of each indication, what percentage of the value of Seroquel currently exists for Seroquel XR? And can you in some way quantify how you expect that to progress with time over the next 24 months?

  • David Brennan - CEO

  • Okay. Well let me do the Seroquel question first and then I will let Paul talk a little bit more about the operating income question and how big that could get in. What else we are going to say about it I am not sure there is a lot more to say.

  • As I said with the XR the initial indication is in schizophrenia. I believe schizophrenia accounts for about a third of the total sales where the bipolar mania and depression market is probably twice that size and growing much faster. The dosing in bipolar is much lower generally than with the schizophrenia. So there is some trade off there, just looking at that.

  • The point I made when I -- in my opening comments about the importance of making sure that we are promoting on label is very, very important to us. So the only discussions we will be having around Seroquel XR initially will be around schizophrenia. It actually is the better positioning for the product right now, because it allows people to get to the dose on the second day. So there is not as much dosage titration required and it is once a day, which is why I said earlier we expect a good -- have this become a leading product from a selection perspective for the treatment of schizophrenia.

  • The generalized anxiety disorder and the major depression indications for XR, which we hope to get in the future when the trials are completed, assuming they are all positive, will take us into some segments of the market that we haven't been in before. I think it's difficult to quantify that.

  • But as I said, our strategy here is not a switch strategy exclusively. We believe there will be some switching, but we are going to establish Seroquel XR in of its own right, first in schizophrenia then in bipolar mania and depression, then hopefully in major depressive disorder and generalized anxiety disorder, subsequently getting us to a bigger overall franchise. Jonathan?

  • Jonathan Hunt - IRO

  • Paul, while we haven't given specifics of how to model it we have given you some help. If you look at the general presentation that's on the website you can download. There is a nice slide in there. You are looking at exactly the right components. Prevalence in the three different, if you think of them as three different markets, schizophrenia, bipolar and depression, the prevalence rates differ there is a slide that covers that. The duration, expected duration treatment differs and the average dosage. So if you've got those three component parts you can make a good guess at how you think those markets will play out.

  • Paul Mann - Analyst

  • That's great. Thank you.

  • David Brennan - CEO

  • Thanks Paul. Next question please.

  • Operator

  • Our next question comes from Mr. Lars Hevreng from Enskilda, please go ahead sir.

  • Lars Hevreng - Analyst

  • Thank you, Lars Hevreng Enskilda. Just your -- the guidance of maybe correct interpretation, is it fair to simply add back roughly $0.20 to your $3.98, $4.13 to arrive at the, what you would define as core EPS for -- going forward. So adding back $0.20 per share, is that a fair interpretation regarding the guidance?

  • But that's one thing. The other thing to Paul, is there any write-down assumed for the fourth quarter? Or is this $0.03 per share contribution? Is that simply the underlying sales of the product? Thank you.

  • David Brennan - CEO

  • All right. Well I will go to Paul in just a moment. I just want to reinforce, because there are number of different components around restructuring, around how we've accounted for Toprol-XL as well as MedImmune. There are impacting things. We've tried to be very clear about our reported statutory earnings. And then the core earnings that we look at which we think are a better indicator of how the underlying business is performing. So, that's spelt out very clearly in the press release. And Paul and I both covered it. I am not sure what else we can add to the -- is there another way to get it core? Ed, do you want to comment on that?

  • Ed Seage - USA IR

  • Yes. I think the key to this is essentially the core EPS represents -- the distinction of what core EPS represents and what the business, excluding the full impact of MedImmune, those are two separate things. Core only adjusts for the amortization component of the MedImmune contribution to our EPS number. Whereas you look at the all in, which either we got it to around $0.30 of the impact -- a $0.30 loss is within the scope of our guidance of $3.98 to $4.13. So the full impact of MedImmune consolidation is in our guidance on a reported basis.

  • Core EPS only adjusts for the amortization component of MedImmune, not their seasonal trading loss, not any of the one-offs and not any of the net interest finance expenses associated with financing the acquisition. So there are two separate paths, and you can't -- you just can't bridge from one to the other thinking its all MedImmune in or out. There are only pieces of that.

  • David Brennan - CEO

  • All right. And then Paul do you want to comment about the write-downs in the fourth quarter? The restructuring program we have in place is the only activity like that, right?

  • Paul Kenyon - Group Financial Controller

  • That's right. And as we guided at the half-year, the majority of the write-downs come in the fourth quarter. It's covered in the press release. We've had about $600m so far. We've got about $900m for the full year, so we're expecting around $300m in the fourth quarter.

  • David Brennan - CEO

  • Good.

  • Lars Hevreng - Analyst

  • But there's no write-down on the product sales specifically in the fourth quarter, since the guidance is only [37%] in the fourth quarter?

  • Paul Kenyon - Group Financial Controller

  • That is a product of the generic erosion that we've seen in the third quarter. All four strengths have gone now, so we're down to full generic erosion sales rate.

  • Lars Hevreng - Analyst

  • Okay. Thank you.

  • David Brennan - CEO

  • Thanks, Lars. Next question please?

  • Operator

  • Our next question comes from Jo Walton from Lehman Brothers. Please go ahead.

  • Jo Walton - Analyst

  • Two quick questions please. Within the MedImmune $212m of operating loss, is that representative of what MedImmune would do in a typical third quarter? Or was it inflated by one-off costs? You've mentioned pipeline rationalization etc, is any of that included? And can you give us some idea of what any one-offs surrounding MedImmune might be like?

  • And the second question is a broader question about the deteriorating outlook in the U.S. market, where you talk about a lot of competition in some of your key areas. With that knowledge, do you believe that you've got the right size of sales force and promotional effort behind those products to maximize them? Are we seeing some of the decline in the rate of prescription growth because you have pulled back on promotion to a greater extent than your peers?

  • David Brennan - CEO

  • Right. Those are two big questions, Jo. Thank you. I'll do the second question first about the U.S. And then I'll go back to Paul to comment on the MedImmune $212m and whether it's typical or one-off and what we can say about it.

  • But let me -- as I mentioned before with Crestor, and I will broaden it now to include Nexium, Symbicort and the oncology portfolio, we look very carefully at our overall promotion levels. And in the -- as I said in the statin market, we are fully competitive with Lipitor. Vytorin have increased their promotion a little bit earlier this year, so they're slightly ahead. But the three products are very close to each other in terms of personal selling activity, details and calls in the marketplace. I think we're very competitive there. We haven't pulled back in any way from that. In fact, I think we've just targeted right where we want to be.

  • With Nexium, the overall level of promotion in the PPI market has come down a bit, because the competitors have reduced their promotional activity. Nexium is still the leading promoted product, both in terms of personal selling as well as in sampling in the market. And I think our view is that we are going to maintain our leadership position in promotion, and continue to differentiate the products in the branded segment of the market, which is, as I said, where we need to compete.

  • I don't think that the product has been impacted in any way by pulling back on promotion in this market. We've been very active in the direct-to-consumer advertising there. But we have used it -- we've pulsed the vat and have continued to do that. So we're back re-evaluating that program. But it's not constrained financially.

  • On Symbicort, we are -- we have a target audience where we want to be, our promotional activity right now. In the first couple of months, actually, our core levels are ahead of the core levels for Advair in the market. Our expectation is that we will be competitive with them, with the new product introduction. We expect we're going to get increased activity at the front end.

  • And with our oncology portfolio, I think we have done quite well to remain competitive. Arimidex continues to grow. We now promote Abraxane. The Abraxane product has an increased share of -- under our sales force. So Zoladex, Arimidex, Casodex have all continued to perform reasonably well.

  • So. No, Jo. I don't think we've pulled back in a way that's impacted our activity. I think we're right sized for the portfolio that we have. And as we pick up some primary care products, hopefully later this -- in the next couple of years with Saxagliptin and (inaudible), as well as, potentially, 6140 and maybe even some others. We expect to be busy.

  • And I think those markets are going to continue to be competitive, to the first part of your question. But they're big markets. 70% of the PPI market is still a $12b market to compete in. And the statin market is going to continue to have a significant segment of use for branded products that are more effective in lowering LDL than generics. It won't be as big as it used to be but that's okay. We can -- we still need to be there to compete.

  • Paul, do you want to comment on the Medi $212m and what you want to say?

  • Paul Kenyon - Group Financial Controller

  • Sure. The split's about $140m of ongoing operating loss in Q3. As you would expect, the one-offs are about $70m, Jo.

  • Jo Walton - Analyst

  • And are we expecting more one-offs? This is pretty early on. I don't know, a couple of hundred million before we're through that process?

  • Paul Kenyon - Group Financial Controller

  • Yes. We guided at the half year that there would be more than $200m of integration costs. And we still expect the bulk of those to come in 2008, as I said in my presentation.

  • Jo Walton - Analyst

  • Thank you.

  • David Brennan - CEO

  • Thanks, Jo. Next question?

  • Operator

  • Our next question comes from Mr. Steve Scala from Cowen. Please go ahead, sir.

  • Steve Scala - Analyst

  • Thank you. I have several questions. First, what was the tax rate after removing restructuring costs and MedImmune-related amortization that drives the core EPS number?

  • And secondly, can you update us on what is currently happening relative to the AZLP valuation?

  • And how is the accounting firm factoring in the risk to Nexium, both from the commercial standpoint as well as the patent risk?

  • And relatedly, do you have a final answer from FDA regarding the claim of cardiovascular risk with Nexium? Thank you.

  • David Brennan - CEO

  • Okay. Well, let me start with the last question first and then I'll go to Paul to get to the tax rate and comment on AZLP, as well how the accounting crowd is assessing the Nexium risk or the patent risk around it.

  • But the discussions with the FDA around the cardiovascular risk issue that was reported in December have been ongoing. There is no new news. I think our position on this was very clear. And the agency saw that we did not see that there was a particular issue left open that needed to be resolved. We have done some additional work. And we're going over it with them. But we don't have any reason to believe that there's -- that we have any additional risk in cardiovascular events. So -- and -- but we are in discussions with them to make sure that they've seen all the data that we have, so that there's no question in their mind either.

  • Paul, do you want to comment on the issues around -- the other ones, tax rate without the MedImmune piece in there?

  • Paul Kenyon - Group Financial Controller

  • Sure. The tax rate we use for calculating core EPS is the same as we use for the reported EPS. So we keep it simple.

  • The AZLP valuation. Sorry, what was the specific question you had on that?

  • Steve Scala - Analyst

  • Well, what is currently ongoing now, since the valuation, I understand, has to be delivered early next year?

  • And then how is the accounting firm going about assessing the risk to Nexium's commercial outlook as well as the patent? I assume their gathering data from new in perspective, or exactly how are they going about that process?

  • David Brennan - CEO

  • Ed? Do you want to comment on those, Ed?

  • Ed Seage - USA IR

  • Yes. I think you've got a bit of the cart before the horse there, Steve. The first activity related to the exonerations of 2008 is the appraised value on the first option. So any valuation exercises that will be conducted ahead of the notice period, and the early part of next year are around valuing the net present value and the contention payments on the old Astra Merck Incorporated products. So it's the (inaudible). And the only factor there, in terms of a product that's not on the market that has to be considered is the ACD-6140.

  • Any activity in terms of trying to value Nexium is related to the second option. And that's not even triggered until two years after the exercise of the first option. That's still downstream. So there's nothing to report in terms of how any objective third-party appraisory would tackle that. But it's early on even to begin to speculate, because it's an event that has yet to be even triggered by the first activity which is exercised or none of the first option.

  • Steve Scala - Analyst

  • But wouldn't Merck's exercise of the first option be key to what might be the outlook relative to Nexium and hence they might not be willing to exercise the first option, so you can't exercise the second? Might they be interrelated in the end?

  • Paul Kenyon - Group Financial Controller

  • You'd have to talk to Merck about that.

  • Steve Scala - Analyst

  • Thank you.

  • Paul Kenyon - Group Financial Controller

  • They have the first call.

  • David Brennan - CEO

  • Good. Next question?

  • Operator

  • We will take our next question from Mr. Tim Anderson from Sanford Bernstein. Please go ahead, sir.

  • Tim Anderson - Analyst

  • Thank you. I have a few questions. The first on Nexium. Is this a category where we should expect to see continued net price declines each year for the next several years in the U.S., as more and more generics become available?

  • Second question is on Crestor and your FDA action date coming up for your artherosclerosis claim from Astra Media. Is it realistic to expect that you'll get a broad-based artherosclerosis claim?

  • And then last question on Saxagliptin with Bristol-Myers. What's your confidence level that you have a fileable drug here in the first half of '08, as has been the guidance?

  • I just can't help but wonder if that drug gets delayed, ultimately because of various potential safety issues, including the impact of that product on blood platelets as was seen in the Phase II trials?

  • David Brennan - CEO

  • Okay. Let me start with Nexium. We have seen a continued price decline in the U.S. It has been part of our strategy around pricing and trying to gain share. We're now focused on trying to gain share from our competitors in the branded segment of the market. So I expect we'll continue to see some erosion of price over time, as we have seen it.

  • On the artherosclerosis claim, it's still -- the discussion is still pending with the agency. And we really don't comment on ongoing discussions. So until it's actually concluded, and we see where it has ended up. I think that will impact in our opportunity to do differentiate and promote. We've got -- we think we've got good data in what we filed. And we believe that there's a benefit that should be ascribed to Crestor as a result of it. But until we get it we're -- until we get it resolved, it's hard to -- we can't comment on it.

  • Regarding Saxagliptin, our plans are still to submit the NDA in the first half of next year. It's pending positive outcome from the ongoing Phase III trials, along with the risk benefit profile, including any adverse events that are reported. So we don't have a particular reason that we're concerned about, beyond just making sure that we've got the risk-benefit balance characterized properly through the program and it's fileable. That's what we're targeting.

  • Tim Anderson - Analyst

  • Thank you.

  • David Brennan - CEO

  • Thanks, Tim. Can we have the next question, please?

  • Operator

  • Our next question comes from Mr. Chris Schott from Bank of America. Please go ahead.

  • Chris Schott - Analyst

  • Great. Thank you. Just a couple of quick questions. Maybe first on market growth. I think earlier you addressed your competitive share voice. Can you tell me about the overall U.S. markets? Is it just a question of slowing volume growth for entire categories in some of the segments you compete after a first strong half?

  • Just what's your view of driving this? Are we seeing impact from (inaudible) and Part D (inaudible) comps? Any color there would be appreciated.

  • Seroquel trends, are we still seeing positive year-over-year mix shift for Medicare Part D in the (inaudible)? Or is all that behind the Company at this point?

  • And finally on 6140, can you just update where you're involvement is regards to Phase III? Thanks.

  • David Brennan - CEO

  • Okay. Well, I'll comment on the market growth and ask (inaudible) for a bit on the -- to take at the mix shift. I don't think there's much more to say around the (inaudible). I think most of that happened at the beginning of last year. And it's not impacting the business right now. I'll ask Ed to take a quick look while I'm answering the first question.

  • I think the growth in the U.S. market is slowing. I think IMS just reported that they've lowered their outlook for overall growth. Yesterday, I believe, they did their annual projection of what they're expecting and it's lower than what they said last year. So it's slowing down.

  • What's driving it? The first thing I think has been the utilization of generics, especially in the two largest markets in the U.S., has exceeded what the -- I think what the assumptions were. So I think that's part of it.

  • There's additional pressures in the [Cope-A] areas, so for some brands, I think, maybe, certain segments of the market get disproportionately affected. So -- and I think the Medicare Part D benefit provided a significant opportunity for growth, and at the same time it has also meant a significant opportunity for the use of generics. So it -- I think both of those things are impacting the market overall.

  • And I think you're probably seeing less aggressive pricing from a price-increase perspective as well. And there haven't been as many new products introduced. So multiple factors. But, generally, I think that's the trend. It's still going -- the U.S. market is still, I guess, between 6% and 7% this year. Our growth there exceeds that, so we're gaining share in the market and performing well. And we'll have to see what other pressures come to bear. Ed, do you want to comment on --?

  • Ed Seage - USA IR

  • Yes. Broadly speaking, most of the year-on-year impact of (inaudible) is anniversaried out.

  • David Brennan - CEO

  • And the 6140 is progressing. Jonathan, you want to comment on that? I think we're probably -- maybe about half way to the 16,000, 17,000 patients?

  • John Patterson - Executive Director Development

  • Yes. It's moving along reasonably well. I think at the half year we were probably about 4,000 or 5,000 patients. It's moved up to about 7,000 patients on the latest view.

  • David Brennan - CEO

  • All right, Chris?

  • Chris Schott - Analyst

  • Okay. Thank you.

  • David Brennan - CEO

  • Thanks. Next question?

  • Operator

  • Our next question comes from Michael Leacock from ABN Amro. Please go ahead.

  • Michael Leacock - Analyst

  • Thank you. Hi. I've just a couple of questions. Firstly, and I wondered if you could give us your perspective on the December 13 Advisory Committee on Nevacor going over the counter? And what do you think the impact would be on your business if that were to be approved?

  • Secondly, I was just wondering, going back to the other operating income, I think Jon Symonds said at the Q2 that the full-year OOI will be around $500m, excluding the HPV royalties. Is that still the case?

  • And I wonder, David, you've been given -- you've been very kind in giving us a clear bridge in terms of the costs between the reported EPS and the core EPS, could you highlight just what synergies and savings have actually been achieved so far?

  • David Brennan - CEO

  • Right. Good. Well, let me start with the Nevacor. I think there's -- I believe that there is a role for potentially an over-the-counter product in this category. I -- if you're asking me that, it's difficult to assess.

  • I think our view has been that the increased efficacy that has been seen with the products that have succeeded Nevacor, so Merck introduced Zocor, Pravachol came out then Lipitor and then finally Crestor, that the incremental benefit of lowering LDL cholesterol, and potentially the increase in HDL, has absolutely demonstrated that there's a decrease in morbidity and mortality associated with using the more effective treatments.

  • So I think -- my view is that the more effective treatments are the ones that should be considered. Whether there's a role for a low-dose, over-the-counter product for people who have mildly, slightly elevated cholesterol levels is something that the committee's going to have to comment on. But our -- we're operating in a different segment of that market with Crestor now.

  • Do you want to comment on the operating income again?

  • Paul Kenyon - Group Financial Controller

  • Yes. Jon did guide to $0.5b at the half year. We stand by that guidance, albeit we'll probably be rounding down to $0.5b excluding MedImmune.

  • David Brennan - CEO

  • And on synergies, Paul, I don't -- I haven't seen exactly how we have reported out on that, other than to say we have the target for around $500m from the MedImmune integration by--.

  • Paul Kenyon - Group Financial Controller

  • We do.

  • David Brennan - CEO

  • 2010, right?

  • Paul Kenyon - Group Financial Controller

  • Yes. And we remain on track to deliver that.

  • David Brennan - CEO

  • We're on track to do that.

  • Paul Kenyon - Group Financial Controller

  • We previously guided there won't be much this year. It will be mainly '08 onwards.

  • David Brennan - CEO

  • Good.

  • Michael Leacock - Analyst

  • Thank you very much.

  • David Brennan - CEO

  • Thanks, Michael. Next question?

  • Operator

  • Our next question comes from Miss Louisa Hector from Lehman Brothers. Please go ahead, madam.

  • Louisa Hector - Analyst

  • Good afternoon. I have a question on formulary positioning. Because I think, David, you mentioned for Seroquel XR that you were comfortable with the positioning. So are we seeing Tier 2 here?

  • And the same question really for Symbicort, so, I guess, what percentage Tier 2?

  • And then just to follow up on Symbicort. You said you were comfortable with the launch progress but $4m in the quarter seemed quite low. Is this just a seasonal effect? Is there sampling that's obscuring the numbers? And -- or is it, perhaps, the formulary positioning that's holding you back?

  • David Brennan - CEO

  • Okay. Let me speak about each of them separately. Symbicort formulary positioning has been very competitive where available, and over 75% of covered lives, which is above our target. And, actually, ahead of where we were with Nexium and Crestor at the same time, in terms of the introduction. And the product has been tiered effectively at the same level as Advair is on. Because it does vary from plan to plan, depending on where they have it. But we haven't preferentially given any discounts to get preferential tiering.

  • I think we've remained competitive price wise. And the formularies have, in general, been pleased to have another product in this category because they recognize there's that medical need and that Symbicort is a good product. So it -- so we're not in any way disadvantaged, I think. And we're continuing to get more acceptances.

  • There is a seasonality associated with it and as our launch -- stocking went in right at the end of the second quarter, we did not expect that there would be a big uptick in the third quarter. Because it's -- because of the seasonality and the fact that we were just getting launched. As I said, the metrics we're following is used by allergists and by pulmonologists. We've seen, as I said, 50% of allergists have used the product. And we're getting uptick in some new patient starts. So we're -- all the things we follow are consistent with our launch plans.

  • For Seroquel XR, we -- the formulary positioning has been relatively the same as we have for Seroquel IR. We priced the product at the same level because we didn't think -- we didn't want to advantage it or disadvantage it in any way. And most organizations have accepted it as such. So, again, I think we've got virtually the same kind of coverage with the XR now as we have with the IR, plus or minus a very little bit. So it's positioned well.

  • We have time for one more question. So can we have our last question?

  • Operator

  • Our last question comes from Mr. Andrew Baum from Morgan Stanley. Please go ahead, sir.

  • Andrew Baum - Analyst

  • Hello. I've just a couple of short questions. Firstly, perhaps you could outline your risk management strategy when it comes to outsourcing? Clearly, by taking part of the manufacturing out of your hands your risk profile is going up. So I'd be interested to know how you're managing that, building redundancy in to ensure GMP demand is satisfied throughout the process?

  • Second, if you have any thing to add on the Cobalt ANDA filing on Crestor? As far as you understand, what are the claims of invalidity which Cobalt is making? What does it refer to?

  • David Brennan - CEO

  • Okay. On the risk management and outsourcing. Obviously, that's a high priority for us. We -- so safety first with everything that we do. And assuring ourselves that there is safeguards in place with any suppliers that we would use that are the same ones that we use internally to assure ourselves that the quality of what's being done, is up to the standard that we want it to be done at.

  • And there are a number of steps that have been put in place. Especially in the manufacturing area, the transition periods tend to be slower because of the regulatory requirements. As you know, there are a number of regulatory issues that have to resolved and we have to be able to demonstrate that anybody that we would outsource anything to meets the same level and standard as is required by the regulations and which our own standards are at least as good, if not better, than the regulations. So I think we've been looking at this pretty aggressively.

  • We are looking, from a supply-chain perspective, to maintain control of the patient-facing end of this supply chain. But we do see opportunities in the API area in the early stage of chemistry to outsource some of it. And we will do some and in other areas we won't. For example, with biologics, we'll -- we will own it all, I think. So it probably goes both ways.

  • Not a lot of color to add on the second one to Cobalt. They have challenged. Jonathan and I were talking about it. And 17 of the top 20 products have been challenged.

  • So this is, obviously, a strategy that's being followed by the generics and we -- and this is a substance patent challenge. So it's right at the core of where we are very, very determined to demonstrate the validity of our patents and the enforceability of them. So we -- next steps have to be taken. This has just happened, which is why we disclosed it this morning. And we will deal with it the way we deal. Each case tends to get its own uniqueness. And so we'll start to develop this one and see where it takes us. Bbut we're confident in our intellectual property and we're going to push hard on it, Andrew. Thank you for that.

  • And, operator, I think that's it. So thank you for -- I'd like to thank all of you for participating in our conference today. And, as always, if you have questions, please feel free to contact our IR Group and get them answered. Thank you for being there today.

  • Operator, that concludes our session.

  • Operator

  • That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen you may now disconnect.