AstraZeneca PLC (AZN) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to AstraZeneca's third quarter and nine months' results analyst call.

Mine name's Sharon and I'm your event manager.

Throughout the conference your lines will remain on listen-only (Operator Instructions).

I'd like to advise all parties this conference is being recorded, and now I'd like to hand over to Jonathan Hunt.

Thank you, Jonathan.

Thank you, Sharon, and good afternoon and welcome, ladies and gentlemen, to AstraZeneca's third quarter conference call.

Leading today's call is Simon Lowth, CFO of AstraZeneca.

Also on the call are members of the finance and investor relations team.

But as usual, before I had over to Simon, I'd like to read the safe harbor statement.

The Company intends to use the safe harbor provisions of the United States Private Security Litigation Reform Act of 1995.

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

By their 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.

With that, now I'll turn over to Simon.

Well thank you, Jonathan, and good afternoon to everyone.

On today's call I'm going to focus on five topics.

First, the headline numbers for the third quarter and the nine months, then I'll cover the third quarter revenue performance by region and by our key brands.

Third, I'll turn to the third quarter core operating performance with an emphasis on the key drivers of operating profit and margin.

I'll briefly touch on cash performance and our steadily improving net cash position.

And finally, I'll close with our thoughts on guidance for the full year.

So on to the headlines.

As you will have seen in this morning's release, we remain firmly on track to achieve our full year financial target, with good execution in the market and strong cash generation in the quarter, although the revenue headwinds we have been expecting are now visible in the third quarter results.

Total Company revenue was $7.9 billion in the quarter; that's a 2% decline in constant currency terms.

Crestor, Symbicort and Seroquel XR all posted strong double-digit sales growth in the quarter.

On a regional basis, we had on a good performance in the emerging markets, where revenue increased by 14% on a constant currency basis.

Despite the Government price interventions in Western Europe, revenue there was up 3%.

In established rest of world markets revenue was up 5% in the quarter on a good performance in Canada, which was driven by Crestor.

Overall, revenue in the markets outside the US increased by 7% in constant currency terms.

As expected, generic competition and the absence of H1N1 pandemic flu vaccine revenues led to a challenging quarter in the US, where revenue was down 13%.

Generic competition for Arimidex, Pulmicort Respules and Toprol-XL reduced third quarter revenue by nearly $0.5 billion in aggregate.

And the negative variance on flu vaccine cost us another $152 million.

Turning to core operating profit for the quarter, the impact of the lower revenues on core operating profit was largely mitigated by operating efficiencies and higher other income.

So the key driver of the 10% decline in core operating profit was the negative impact on gross margin from an intangible asset impairment charged to cost of sales this quarter.

And this is set against the core gross margin in the third quarter of 2009 which benefitted from the release of a provision related to the resolution of a third party supply contract issue.

So taken together, this quarter's impairment, and last year's provision release, account for a $285 million swing in core gross profit.

Core earnings per share in the quarter were $1.50 compared with $1.68 last year.

This is a 10% decrease at constant currency, in line with the core operating profit trend.

Now making the bridge from core EPS to reported EPS in the quarter, we have the usual adjusting items; restructuring costs, which were somewhat higher than the third quarter last year and then MedImmune and Merck related amortization, which are broadly stable year on year.

Legal provisions are the biggest swing factor in the core adjusting items.

Compared to $108 million in Q3 2009, legal provisions totaling $478 million have been charged in the third quarter of 2010, of which $473 million relate to the ongoing product liability litigation for Seroquel.

Of the $473 million, $203 million relate to the agreements, in principle, that have already been reached to date to resolve more than 18,250 claims.

The balance of $270 million is an additional reserve, which is the aggregate of two components.

First, estimates for settlements costs of remaining US claims that have not yet been resolved, and are still subject to remediation.

And second, the anticipated future defense costs associated with resolving all, or substantially all, for such remaining claims.

Now the detail is included in note five, in our third quarter financial statement.

Net of these adjusting factors, reported EPS was $1.08 compared with $1.46 in the third quarter last year, so a 26% decrease.

So that's the third quarter headlines.

I'm not going to dwell on the nine months' figures.

In brief revenue increased by 2% at constant currency, core operating profit was unchanged, and core EPS was up 7%.

I'll now turn to our third quarter product highlights, starting with Crestor.

And for the avoidance of doubt, when I refer to revenue growth rates it is on a constant currency basis.

So Crestor revenue was up 20% in the quarter to nearly $1.4 billion.

Crestor's volume growth continues to significantly outpace the statin market in all regions of the world.

Revenue in the US was up 20% to $626 million.

Crestor's total prescriptions increased by 12%, that's five times the statin market.

Crestor's share of total prescriptions in the US continued to increase reaching 12% in September.

And dynamic share, so that's the share of new starts and switches, that remains north of 15%.

Crestor revenue in the rest of world was up 21% to $748 million.

There was good growth in Western Europe, particularly in France and Italy, as well as a good launch uptake in Spain.

In the established rest of world, Canada, Australia, Japan all had strong performances.

Sales in emerging markets increased by 23%.

So turning to the Seroquel franchise, third quarter sales were up 7% to $1.3 billion.

Growth was fuelled by Seroquel XR, which was up 50% in the quarter, whilst sales for Seroquel IR were off just 1%.

In the US Seroquel sales were up 10% to $936 million, total prescriptions for the Seroquel franchise increased by 60 basis points in the quarter, and market share is down, just a bit, by around 17 basis points since June.

Seroquel XR sales were up 66% in the quarter and has grown to 17% of franchise revenue and 15% of franchise prescriptions in the US.

Seroquel XR sales in the rest of world were up 45% in the quarter, and now account for a third of franchise sales outside the US.

Seroquel XR franchise sales in the established rest of world were down 4%, largely reflecting phasing differences in the timing of shipments to our marketing partner in Japan.

This partially offset by some growth in Canada, now that generic erosion on Seroquel IR has stabilized following the loss of exclusivity in 2008.

Franchise sales were up 10% in emerging markets; sales in Western Europe were unchanged.

Symbicort had another good quarter with sales up 19%.

Sales in the US were up 40% to $175 million; Symbicort prescriptions were also up 40% compared to a 4% increase for the fixed combination market.

In the US, Symbicort's share of new prescriptions the fixed combination product increased to 19.3% in September.

That is up another 40 basis points during the quarter.

And market share of patients new to fixed combination therapy is 26%.

Symbicort's sales in the rest of world were 13% ahead of last year.

Sales in Western Europe up 4%, sales in established rest of world were up 56%, reflecting the launch in Japan where volume share is now over 20%, and new patient share is north of 30%.

Sales in emerging markets were 26%.

Globally, Nexium sales in the third quarter were up 2% with sales of just over $1.2 billion.

Sales in the US were down 1% to $682 million.

Dispensed retail tablet volume declined by around 4%, although we continue to do an excellent job of holding share.

Nexium market share of dispensed units is down only 30 basis points in September 2010, compared with December 2009.

Average realized prices were up 4% in the third quarter, just about flat year to date, and I think they'll probably be flat, or slightly down, on the full year.

Sales in Western Europe were up 1%.

One of the upsides in our revenue performance this year has been the slow entry of generic in Europe where exclusivity in the so called 10-year market expired in March.

And this is very reminiscent of Toprol in that assumptions on the timing of generic entry are uncertain.

During the quarter we saw a generic approval in the UK, with no launch as yet and with litigation ongoing.

There have been several launches in Germany, and we initiated legal action there on October 15.

There's also been a launch in Spain where legal action continues.

Sales in emerging markets for Nexium are up 16% including 47% growth in China.

A 19% increase in Canada was fuelled by a 5% increase in established rest of world.

Sales of Arimidex were down 38% in the third quarter to $284 million.

Of course, the launch of generics in the US is the reason.

Sales in the US were down 80% to $43 million following the generic approvals in June.

Arimidex sales in other markets were down 4% in the quarter.

We have been granted the extensions for the Supplementary Protection Certificates in 12 member states in the EU, including France, Italy, the UK and Germany, and this has extended market exclusivity until February 2011.

ONGLYZA revenue was $19 million in the third quarter, of which $16 million was in the US.

ONGLYZA share of total prescriptions in the US DPP4 market reached 9.1% in the latest weekly data, and share of patients newly starting DPP4 treatment was 24.5%.

I'll now turn to the third quarter P&L.

I'll focus here on core margins and profit.

The press release does, of course, contain the statutory numbers and a detailed reconciliation to the core measures.

As with sales, when I refer to growth rates they will all be on a constant currency basis.

Core gross margin was 80.9% of sales for the quarter, and that compares with 84.9% of sales in the third quarter 2009.

Now as I mentioned at the start of my presentation, last year's gross margin benefitted by a provision release, whereas this quarter we had an intangible asset impairment charge, a net $285 million swing year on year.

The impairment is related to the decision to discontinue further development of AZD3355.

This was one of the assets involved in the Merck exit arrangements.

When an intangible is related to relief from future contingent payments, as it is in this case, we do not exclude the impairment from core earnings.

Gross margin for the nine months was 81.7% of revenue, and I expect the full year will be around this level.

Core SG&A expense was down 1%, compared with the third quarter last year.

We continue to invest to grow our emerging markets business, as well as the new product launches.

These were more than offset by operational efficiencies across the established markets.

As for phasing, I point out that the fourth quarter is often the highest core SG&A spend in the year, with last year's fourth quarter coming in at just over 34% of sales.

Whilst the fourth quarter 2010 is likely to be below last year in dollar terms, I'd anticipate the same seasonal pattern compared to the previous three quarters.

Core other income was $79 million higher than the third quarter last year, including royalty income on the Teva generic for Pulmicort Respules.

I still expect core other income to be just under last year's level, which you'll recall was $926 million.

So that leads to a core pre R&D operating margin of 53.4% of revenue, that is down 370 basis points in the quarter, chiefly on the gross margin variance.

Core R&D expenditures were 5% lower compared with the third quarter last year, but as expected, a bit ahead of the run rate seen in the first half.

We continue to increase our investment in biologics; project spend is still lower than last year across the small molecule portfolio.

And although we are starting to see some ramp up with the Phase III start for the antidepressant TC-5214 and Fostamatinib for arthritis.

So far this year, we have also seen lower intangible impairments go through the R&D line than in the recent past, but that is always dependant on data milestones, so it's a hard one to forecast.

So core operating profit was down 10% in the quarter in constant currency terms.

Core operating margin for the quarter was 40.9% of revenue, down 340 basis points with the gross margin movement largely driving the variance.

Turning to our productivity program, we have taken restructuring charges of $212 million in the third quarter, bringing the year-to-date total to $770 million (sic - see press release).

As covered in the press release, the program is on track for both costs incurred and the benefits being realized.

Let me now turn to cash flow.

Net cash from operating activities for the nine months was around $0.5 billion lower than last year.

This is largely driven by the legal settlement payments related to Seroquel sales and marketing practices and the AWP litigation in the US, which more than offset a good underlying cash performance.

Net cash distributions to share holders for the nine months increased to nearly $4.7 billion through dividend payments of $3.4 billion and net share repurchases of $1.3 billion.

We are still targeting $2 billion in net share repurchases for the full year.

Overall, our net cash position improved during the quarter, and is now $1.3 billion as at September 30.

Finally turning to guidance, we've turned in a good performance year to date, with revenue and core earnings ahead of last year.

We're driving good revenue growth on the brands that retain exclusivity, such as Crestor, Symbicort and Seroquel XR.

Our business outside the US has done well fuelled by [mid teens] growth in emerging markets.

And we continue to advance our productivity agenda across all parts of the organization.

Starting in Q3, the headwinds that we had expected are now upon us, and demanding revenue and core EPS comparisons will carry into the fourth quarter as well.

Nevertheless, based on the year-to-date performance and the outlook for the remainder of the year, revenue for the full year is now likely to be broadly unchanged, in constant currency terms, compared with the full year for 2009.

The core earnings per share, with one quarter to go, we've narrowed the range by increasing the lower end.

The target for core EPS is now between $6.50 to $6.65, compared with the previous guidance of $6.35 to $6.65.

Again, guidance is based on January 2010 average rates for our principal currencies.

Compared with the guidance rates, actual rates for the nine months year to date have resulted in an adverse variance of around $0.08 in core EPS.

Of course, we're taking no view of the future movements for currency.

So going forward, this guidance takes no account of the likelihood that average exchange rates for the remainder of the year may differ materially from the January 2010 average.

As usual, I'd point you to our currency sensitivity chart to help you flex your own estimates on the currency impact for sales and earnings.

I'll wrap up my formal remarks here and turn the call back to the conference operator to begin the question and answer session.

Thank you.

Now, ladies and gentlemen, your question and answer session will now begin.

(Operator Instructions)

And our first question comes from the line of [Brian Bordeaux] of Barclays Capital.

Thank you, go ahead.

Thanks very much.

Good afternoon, it's Brian Bordeaux from Barclays Capital.

A few questions please.

Firstly on Crestor, could you give us some color as to the mix of your new patients in the US, particularly with regard to how many of them quality under the Jupiter criteria?

Secondly, emerging markets; we've seen your constant currency growth rate of sales in emerging markets go from 19% growth in Q1, 16% in Q2, 14% in Q3.

I guess it's tempting to extrapolate that and suggest there is a slowdown there.

Would we expect to see significant volatility in this growth rate, going forwards, bearing in mind emerging markets are growing at around 14% to 15%, and whether you can grow above that rate?

And lastly Seroquel; you've taken additional legal provisions there.

Is this now a reasonable expectation for your Seroquel product liability exposure, or could we expect to see further charges here?

Thanks very much.

Okay, Brian, well thanks for those three questions.

Let me address the emerging markets question.

I'll ask Ed to talk about Crestor in the US, and I'll come back and talk about the Seroquel product liability question.

So in the emerging markets we continue to see strong double-digit growth in our emerging markets business, and that's very much in line with the mid-term planning assumptions that we set out.

We do see, across the portfolio, some variability in growth rates from quarter to quarter as a function of particular dynamics, in particular markets.

But I wouldn't draw any particular trend from the movements in the three quarters that we've had during the course of this year, Brian.

We are very much on track with our plans in new markets, pleased with the progress that we're making and the performance we're delivering, and continue to see this as an important opportunity for strong long-term growth for the Company, as we go forward.

Ed, Crestor in the US; the question was really whether we can give any more granularity around mix of patients.

I don't know if you'd like to offer any thoughts?

Yes, I think it's fair to say that Crestor's performance in the market has been driven by its very strong positioning in the patients who have multiple risk factors of higher risk cardiovascular patients.

But we can only tie that to actual new therapy initiations by inference from qualitative research about where positioners say they position the drug.

We really don't have any line of sight of the granularity of which of those patients would meet the Jupiter criteria rather than what patients would be considered higher risk by their, either previous [MI] or, indeed, their high LDL levels.

So unfortunately, we can't get that level of detail.

But I think it's fair to say that Crestor's position as the statin best suited for patients at elevated cardiovascular risk certainly is driving the performance.

Thanks, Ed, for that.

And I think the only other comment I would add, Brian, to that is, I think where we do have a very good picture is the fact that Crestor is increasingly viewed, very clearly viewed, as the first treatment choice for patients that are at risk with multiple factors.

And we can see this, for example, if we look at research we do amongst physicians and ask, what's the first treatment choice for at-risk patients?

If you went back a couple of years the response to that would have been 30% for Crestor, 39% for LIPITOR, 21% for Simvastatin.

Two years on, the 30% for Crestor has moved to 54%, and the 39% for LIPITOR has moved to 24%.

So we can see a very clear recognition amongst the physician population that are polled that they understand the role that Crestor can play in treatment.

Coming back then to your third question, which was on the product liability matter with Seroquel, I think I described in my remarks the nature of the provision that we have taken during the quarter.

To remind you, at this point in time we have an inventory of claims made against the Company.

We continue to see limited merit in those claims, and are continuing to defend them vigorously.

As you know, many cases that have been brought before courts have, in fact, not made it to a full trial.

Only one has taken place earlier this year and we were successful.

So the process of litigation continues.

Having said that, the court asked us, and the various plaintiffs' lawyers, to participate in a process of mediation.

We've entered into that process and are participating very constructively within it.

We've reached agreement, in principle, to settle with more than 18,250 claims, and that's $203 million of the provision.

And then we've taken an additional reserve, which is our best estimate of the settlement costs and future defense costs associated with the remaining cases that we see.

So that's the position today.

Clearly, it's not easy for us to predict, at this point, how long it will take to resolve these matters where we have agreements in principle.

And obviously, in the outstanding cases, we've made a best estimate of that amount.

It's also fair to say that we do see some new cases coming but, as you'll have seen if you follow this matter in our accounts, it's a very low number of new cases that have been joining if you look at it over the last year or so.

So hope that gives you a little bit more understanding of that issue, Brian.

So thanks for the question.

No, thanks very much for those detailed responses.

Thank you.

And the next question comes from the line of Tim Anderson of Sanford Bernstein.

Thank you, go ahead.

Hi.

I have a question related to Crestor and generic challengers.

So specifically Watson Pharmaceuticals has filed a new drug application for a rosuvastatin zinc formulation, which is a different salt formulation.

I'd be curious to get your comments on the potential impact of that.

My understanding is that that may not happen until 2013.

But more importantly, I'm hoping you can comment on the ex-US market situation.

So just like Plavix, our early surprise generic competition in Europe from different salt formulations that were deemed equivalent, might the same occur in the case of Crestor?

Thank you.

Tim, thanks for the question.

Dealing first with the situation in the US; as we all recall in June this year the Delaware court decided in our favor on the consolidated ANDA infringement case involving the eight initial filers seeking approval for generic Crestor.

That was on the calcium salt.

We have received a follow-up [powerful] letter from Watson in September informing us of a filing of a -- it's a 505 filing for zinc formulation.

The letter challenges the substance patent and the formulation patent for Crestor.

We've filed suit against Watson for patent infringement, and we expect that process to initiate a 30 month stay.

Tim, you're probably aware that seeking approval for different salt forms, you don't file an ANDA.

It's a similar but different application, a so-called paper NDA.

As a different salt form, it's considered a different active ingredient.

And it has to be shown to be bioequivalent in the [rate of] approved salt form.

And they're not, in the US anyway, they're not considered therapeutic equivalents.

So that's where we stand with Watson.

We filed suit.

We'll commence that process and expect a 30-month stay.

If you turn back to Europe, Crestor's protected by substance patent in most European markets that the patent covers, the super statin and all pharmaceutically acceptable salts, including zinc salts.

I'm not going to speculate on what further action might take place in Europe at this stage.

So thanks, Tim, for the question.

Thank you.

And our next question comes from the line of Andrew Baum of Morgan Stanley.

Thank you, go ahead.

Good morning.

Simon Johnson.

Perhaps you could talk to the theme of what R&D spend we should be thinking about for the next couple of years, because not only, as you highlighted, have you recently initiated a glut of what looks like to be expensive and long clinical trials, and I guess I'm thinking of PEGASUS among the two you mentioned, but also Astra now has laterally hired senior R&D executives who, presumably, are going to be arguing for more rather than less money.

So perhaps if you could talk to that and give us some kind of framework as to what to expect?

And maybe also comment whether we're seeing the impact of the announced plant closures within the P&L already, or whether that's something to be seen in forthcoming quarters?

Okay.

Well, Andrew, thanks very much indeed for the question.

If I talk just about the short-term dynamics in the R&D spend; we continue to make good progress in our efforts to restructure and improve the cost productivity within R&D.

We announced, as you know, a series of major initiatives at the beginning of the year; a refocusing of our disease area strategy into those areas we really felt we could make a difference; a consolidation of our geographic footprint with closure of some sites, including two significant sites.

And we continue to drive ongoing productivity across R&D as, indeed, across broader AstraZeneca, through outsourcing activities, procurement initiatives, lean improvement activities.

All of those efforts are having an impact in improving the unit cost position in R&D, and that is an impact on the R&D cost position that you've seen during the course of this year.

The run rate was lower in the first half of the year as a number of late-stage trials completed, and you've seen it step up a little bit in this third quarter.

And, as we've guided, we see that continuing into the fourth quarter as a series of late-stage trials initiate.

As we go into '11 and beyond, I would expect those continuing dynamics.

I'm pleased to say that our new colleagues leading the R&D organization are wholly aligned with our overall strategy, are as focused on ensuring we deliver valuable new patents for medicines and, at the same, generate attractive returns on investment as our shareholders, as aligned with that, as indeed I am, and will be managing our cost base accordingly.

To give you a sense of the quantum of investment in R&D I point you, Andrew, to the mid-term planning assumptions we laid out where we explained our revenue corridor of $28 billion to $34 billion.

We explained that we would be delivering pre-R&D margin in the range of $48 billion to $54 billion.

And thirdly, and critically, in answer to your question, that we'd be reinvesting between 40% to 50% of our post-tax pre-R&D cash flow back into the business to drive future growth in value.

That would cover R&D expense in our in-house R&D.

It would cover cash investment in licensing, and it will also cover capital investment in plants and information technology.

The latter, if you look at our accounts, you'll see has been running at around $1 billion or so, a little north of $1 billion, $1.1 billion.

That gives you a sense of what, over that five-year period, a level of reinvestment would be.

And, as you know, Andrew, I don't split that between expense, what's expensed through the P&L and cash investment in licensing.

To me it's all cash and it's all an investment in generating medicines for patients.

So thanks for the questions.

Thank you.

The next question comes from Gbola Amusa of UBS.

Thank you.

Go ahead, Gbola.

Hi.

Thanks for taking my call.

A couple of questions on Crestor first and the ATP 4 guidelines which, after some delays, are due for public comment in the spring and publication in the fall.

Just given the Jupiter progress, to what extent are these guidelines necessary to more fully capitalize on the entire message?

My second question is on Brilinta and the PEGASUS-TIMI 54 study.

And thinking about Plavix, we can see the use for 250 to 350 days after acute events seems to double ACS sales.

And I know the answer's perhaps years away, but the question is, what multiplier effect would multiyear anti-platelet use have on the potential of anti-platelet drugs?

Okay.

Well, thanks for those couple of questions.

I think it is too early for us to address your question on the different treatment paradigms that we may see for anti-platelet medicines.

We're obviously focused very much at the moment on our launch preparations for Brilinta.

We're looking ahead to the PDUFA date in mid December, and we're very pleased with the positive approval in Europe.

And, as we've said, we're initiating the PEGASUS study.

And it's all part of a comprehensive program to ensure that we build on Brilinta and ensure it's a successful medicine for patients.

I can't really comment much beyond that timeframe.

I don't know, Ed, if you want to pick up the question on the guidelines in Crestor?

Clearly, it's an important part of shaping overall use of statins in the US market.

Ed, any comments to add?

Yes.

I think we're going to look forward to seeing exactly where those guidelines land in terms of the role of CRP in defining patients who warrant treatment.

So certainly those guidelines can support the education of physicians and patients as to what role that might play in diagnosis and initiation of treatment.

I also wouldn't ignore the fact that the other component of those guidelines could very well be just setting more demanding goals for on-treatment LDL lowering which, of course, would also play directly to Crestor's strengths.

So I think there's two aspects of the emerging guidelines that we think could be very useful.

But again, until we actually see their draft, never mind what emerges after the comment period, it's speculation.

But I think there are two components for those ATP guidelines that should play to Crestor's strengths.

Thank you.

Thank you.

And the next question comes from Alexandra Hauber of JPMorgan.

Thank you.

Yes, good afternoon.

Three questions, please.

Firstly, on Nexium, how much of a generic erosion in Europe should we expect?

And I do appreciate that it's probably difficult to answer, given that on France, which is the biggest chunk, you haven't even got an approval -- there is not even approval for a generic.

But I thought you may have some idea about timelines, when that is coming.

And also maybe tell us whether you would expect France to be a fast or a slow erosion country.

Secondly, given that we all look a lot closer at cash, on the litigation front how much of the litigation provisions are still sitting on the balance sheet and need to be paid out?

And would it be fair to assume that most of that will come out in the next 15 months?

And then the final question is on the transfer pricing that you charge to Astellas in Japan for Symbicort and Seroquel, can you just roughly give us a percentage what that transfer price is of Astellas' selling price is?

Okay.

Well, thanks for those questions.

I deal with the third one because it's the quickest one to answer.

We're not in a position to be able to give you that information.

It's not something we and our partners disclose.

Would it be then assumed that it's just a 50/50 economic share you have in the product?

Or is it --

I'm not going to provide further information into that arrangement.

If I turn to your second question, which was around the cash position on the litigation provision, you'll recall that we took a provision in the middle of last year on the AWP and sales and marketing issues.

And you'll have seen that that was a provision taken, and that that cash has now broadly been expended.

And in fact, I called that out as the main driver for the fact that our operating cash flow is lower in this period than last period.

So that is the 15 month delayed payment on that provision.

If you look at the provision we have taken this quarter, that is obviously a provision on the balance sheet.

Alexandra, it's difficult to predict the timing of that cash flow in that we have, as I mentioned during my remarks, at this stage simply reached agreement, in principle, in a mediation process.

There's many aspects of that agreement that still need to get worked through with the first category of plaintiff lawyers on the 18,250.

And in the remaining claims, where we've taken a provision, that's a matter which we haven't reached agreement in principle.

It's unclear exactly how that matter will be resolved.

So I'm not able, at this time, to predict the timing.

And on your third question with Nexium in Europe; the position, I think, is, as we all know, Nexium in Europe is protected with a variety of patents.

In addition to that, it had data exclusivity which expired some time ago in the six-year markets, but at the end of March in the 10-year markets.

The resolution of this happens on a country-by-country basis.

So the timing really is a function of the generic applications, regulatory approvals and the process of litigation in 10, 15 markets around Europe.

The position at the moment is that we have, as I mentioned, had launches in a number of six-year markets, including Spain, Ireland, Austria, Denmark.

We've had launches in Germany, being the first of the 10-year markets.

In those cases we are in a process of vigorous litigation, and we will have to see how that situation unfolds.

It will be one of the variabilities that we will take into account in January when we share with you our expectations for 2011.

And, Alex, just to add one other thing.

You are right in highlighting it.

It's going to be a challenge for you to track because you're going to have to track it not at a pan-European level, but almost on a country-by-country basis.

France is one of the larger markets; as yet, we haven't seen a generic there.

From memory, that's approaching about a third of the revenue in the main European markets.

That's right; it's about a third.

It's the largest single market in Europe; quite comfortably so.

So something to think about, I think, throughout the shape of 2011.

Thank you.

Thank you.

And the next question comes from the line of Gavin Macgregor of Credit Suisse.

Thank you.

Thanks very much.

Just one question from me on pricing and discounts of some of your key brands in the US.

So if I look at the net realized selling prices for Symbicort, Crestor and Nexium through each of the quarters this year, they're quite different trends.

With Symbicort we've seen plus 10% growth in 1Q, now 4% to minus 1% or minus 2% in the third quarter.

For Crestor we've seen stable single high digit growth throughout the year, while for Nexium it's gone from being price declines now to plus 4% growth in the third quarter.

Given that each of these drugs is really the list price rises aren't changing hugely, can you give a bit more color on what's driving the apparent differences in the discounts, and whether we expect these to continue, going forward?

Thanks.

Okay.

So the overall dynamic is obviously shaped by list price increases which were taken a couple of times in '09, but only at the beginning of '10.

So you'll get a dynamic created by timing during the quarters of '10.

And we've seen that to an extent this year.

Secondly, against list there are then a variety of rebates and discounts that are negotiated on a [formally-by-formally] basis with our managed care customers.

And clearly the mix between customers in any point in time can have a bearing on that, as can movements in terms of stocking.

I don't know, Ed, if you'd like to add any comments, [US] specific?

[I think] that aspect of the volatility as well as you're always truing up in arrears the rebates that you apply to managed care and the like.

So a lot of your quarterly volatility is just that noise within the system.

I think the fair point is to say is that we are seeing net realized prices gained in Crestor and Symbicort, i.e.

we're not steeply discounting those products in order to drive the market share that you're seeing in the marketplace.

Nexium, from a period of several years where the price declines and realized prices were pretty significant, we've now probably reached a period of more steady state.

So the qualitative takeaway is probably more indicative than looking at the quarterly phasing.

Yes.

And just to be absolutely clear on that, Gavin, that Ed makes a very important point.

In accounting for discounts with our customers in the US, we're essentially accruing based upon a whole series of algorithms developed over time.

But obviously in each period if that algorithm doesn't quite get us to exactly the right number we then make changes in the reserve.

And that can create some volatility on a particular brand in a particular quarter.

Great point, Ed.

Okay.

Any other questions?

Thank you.

And the next question is from Kevin Wilson of Citi.

Thank you, go ahead.

Thanks very much.

A question on emerging markets and investment in emerging markets.

Relative to your expectations, let's say, a year ago, are you finding that you have to spend more on sales and marketing to support the growth in emerging markets than you thought?

Or is it the same?

And what's the competitive situation?

Is it just for a free for all opportunity, that the more you spend, the more you get?

Or do you find that the competition is, in some way, going to get in the way, and you're going to have to spend more than you thought?

Okay, Kevin.

Well, thanks for the question.

I think that the headline answer to your question is that we are not seeing a significant change in the sales and marketing cost intensity of our business in the emerging markets; i.e., we're finding we're getting the return on our sales and marketing investment very much in line with our plans and expectations.

We look very hard at each quarter, when we review our business performance; we look very hard at the dynamics in our main markets whether we see an opportunity to put more sales and marketing investment behind particular geographies, particular brands.

And this is amongst the best investment opportunities that we see in our business, and where we see a good investment, we will invest.

And that's one of the factors behind the remarks I made in my presentation initially which is, you tend to see a bit of a step up in sales and marketing costs, SG&A, in the third and, more importantly, fourth quarter.

And that really reflects that dynamic.

I think, stepping beneath that, we do, obviously, look at the competitive situation, and we need to make certain that our message is being heard loudly by physicians, players in our key markets.

And that can require us to put additional sales and marketing investment behind brands in the market, but that's very much in line with our expectations.

I would also say, though, that we're beginning to look very hard at bringing into our emerging markets the different sales and marketing approaches which we've been introducing in North America and Europe.

And you've probably heard about these; the customer service assistants, the inside sales effort, the digital presence.

All of these, we're starting to look at their applicability in our emerging markets as a way of both reaching more customers faster, and also more efficiently.

And I think that will increasingly be a dynamic, as we go forward.

So thanks for the question.

Thanks.

Thank you.

And the next question is from Keyur Parekh of Goldman Sachs.

Thank you.

Keyur, is your line on mute?

Keyur, we've [released] your line this end, if you'd like to go ahead and ask your question.

Okay, I think we'll maybe go to the next question.

And the next question is from Justin Smith.

The first is on in-licensing.

Since the arthritis product in the first quarter, we seem to have seen a bit of a slowdown in in-licensing deals.

Just wondered if you could share a few thoughts on what's driven that, and how we should think about that activity, going forward?

And then, the second question is just on Symbicort.

I would be very interested to hear your thoughts on how you're thinking about how that franchise may develop, going forward, if we do start to see once-daily competition there.

Thank you.

Let me talk about in-license.

I don't know if, Jonathan, you want to pick up on Symbicort franchise.

No, I think in-licensing, Justin, is a very important part of our strategy.

We're seeking to create as much flexibility in our in-house R&D cost base, so that we can genuinely look at in-house opportunities to take into late-stage development, equally alongside in-licensed opportunities, and look at that in a balanced and agnostic way.

So it remains a core part of our strategy.

We have a very active business development team, working with our various therapy area teams, looking at opportunities.

We're very active.

We're involved in a number of situations and discussions; we just haven't seen one coming to fruition in this period.

But if you look back, we did six in pretty rapid succession, but actually hadn't done any significant deals for the prior nine months or so before that.

So it's a reasonably typical pattern; I wouldn't draw anything more from it.

Core part of what we do; we'll continue to look to bring in good opportunities.

John, do you want to touch on Symbicort, the dynamics, as we move forward?

Yes.

Justin, I'd focus really on the performance now, and a continuation of that.

We're pretty pleased with the performance of Symbicort.

If you look in the quarter, plus 19% growth.

Good progress in the US; we're up to 26% new to combination share in that market.

You're seeing a similar sort of pattern of accelerating growth in the emerging markets as well.

So pretty good performance.

I wouldn't want to try and do a compare and contrast with a once-a-day new entrant as we haven't seen the data, and it's not there in the marketplace yet.

Thank you.

Thank you.

The next question comes from the line of Mattias Haggblom, Danske Markets.

Thank you.

Thanks for taking my question.

Two questions, please.

Simon, the fact that you're raising full year sales guidance to flat sales in local currencies, but only tightening your core EPS range, what does that tell us of the quality of the earnings?

Does it imply some underlying margin contraction, or why are you not raising the full core EPS range as well?

And then, secondly, with the possible approval of Brilinta in December, would that be enough to revisit your mid-term guidance in connection with the full year report in January?

As I would assume that it's a critical element of your $4 billion to $6 billion of sales 2014 coming from pipeline and in-licensing.

Or would that still be premature to do already in 2014?

Thank you.

Okay.

I think, to your second question, we will review and update you on mid-term planning assumptions in January, including the contributions from our pipelines, of which you're right, Brilinta was always a significant component of that.

We've not got really any further information to share, relative to that which we had when we set out the mid-term planning assumptions.

We're obviously pleased with the positive view in Europe, and look forward, as I said earlier, to the December PDUFA date for Brilinta.

In terms of the guidance for this year, we do see a little bit more on the sales line.

Hence, our view now is likely to be unchanged, versus low single digit.

On the other hand, we've taken an impairment in the quarter.

And as I also mentioned in my remarks, we are seeing good opportunities for investment to drive growth in some of our emerging markets and indeed, actually, in a couple of established markets.

And as I guided in my remarks, we expect the fourth quarter to be quite a busy period for sales and marketing investment.

It was last year as well.

A similar pattern, probably.

And so, bringing all that together, we see our outlook for the year unchanged, at the top end.

And obviously, with just a quarter to go, greater confidence in we've pulled up the lower end.

Okay, thank you.

Thanks a lot.

I think we're probably reaching the end of the call.

I know that all of you have got a busy day.

I think there's something like 40 companies, isn't that right, reporting in Europe today.

So I know all of you have got a busy day.

So let me draw the call to a close and thank you for joining us on the call today.

We continue to drive performance, especially on our key brands, where we've got exclusivity and, as I mentioned a few times, in the emerging markets.

We're making excellent progress on our productivity agenda.

We're reshaping the cost base to drive the future competitiveness of AstraZeneca.

Cash generation, as you can see, is strong, and it's funding both our investment in future growth and value, and also providing strong cash returns for our shareholders.

And finally, we remain firmly on track to achieve our financial targets for the full year.

So with that, thanks very much indeed.

Thank you.

Thank you, ladies and gentlemen, that concludes your conference today.

Thank you for joining.

You may now disconnect, and have a nice day.