AstraZeneca PLC (AZN) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to AstraZeneca's third quarter results analyst conference hosted by Simon Lowth, Chief Financial Officer. My name is Sharon, I'm your event manager today. All parties remain on listen-only until the question and answer session. (Operator Instructions). I'd like to advise all parties, this conference is being recorded. And now, I'd like to hand over to Karl Hard, who will read the safe harbor statement. Thank you.

Thank you, operator, and good afternoon. Welcome, ladies and gentlemen, to AstraZeneca's third quarter results analyst conference call. Before I handover to Simon Lowth, I would like to read a safe harbor 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 in respect to the operations and financial performance of AstraZeneca. By their very nature forward-looking statements involve risk and uncertainty, and results may differ materially from those expressed or implied by these forward-looking statements. The Company undertakes no obligation to upgrade forward-looking statements. Information about the principal risks which may affect the Company can be found in the Company's annual report and form 20F information. I will now hand over to Simon Lowth.

Thank you, Karl, and good afternoon to everyone. AstraZeneca delivered a third quarter revenue and core earnings performance that was in line with our expectations, against a backdrop of generic competition and Government interventions in price. We continue to invest where we see opportunities to create value, both in research and development, and in sales and marketing. But we are also actively reshaping the cost base to improve competitiveness for the long term.

This balanced approach continues to drive strong operating cash flow, and has supported increased cash returns to shareholders, with dividends and share repurchases up substantially over last year.

On today's call, I will focus on five topics, with an emphasis on the quarter, rather than the year to date. So first, I'll summarize the headline numbers, then I'll cover the revenue performance by brand and by region. Third, I will turn to the core operating performance, with an emphasis on the key drivers of operating profit and margin. I'll briefly touch on cash performance. And finally, I will close with our thoughts on guidance for the full year.

So onto the headlines, total Company revenue was $8.2 billion dollars in the quarter, a 2% decline in constant currency terms. Crestor, Seroquel XR and Symbicort all posted good sales growth in the quarter. As anticipated, we continue to face revenue headwinds from Government interventions on price, and from generic competition.

We lost more than $350 million in revenue in the quarter from generic competition, chiefly Arimidex and Merrum globally and from Nexium in Europe. But that is a bit better than the run rate for the first half, because we are now more than 12 months past the onset of generic Arimidex in the US.

I'll discuss the regional and brand revenue performances shortly, but let's continue with the headline numbers. Core operating profit in the quarter was down 2% in constant currency to $3.2 billion; it's in line with the decline in revenue. Core earnings per share in the quarter were $1.71, compared with $1.50 last year. That is a 12% increase in constant currency terms, with the leverage between core operating profit and core earnings resulting from a lower tax rate, a lower number of shares outstanding as a consequence of the repurchase program, and lower net finance expense.

The 140% increase in reported earnings per share reflects, of course, the gain on the sale of Astra Tech that was completed in August. This amounted to $1.08 per share, and was excluded from core earnings. You will note that the profit on the Astra Tech sale was a non-taxable event, and this is reflected in the delta between reported and core tax rates. Legal provisions were also higher in the third quarter last year, which also benefits the growth rate in reported EPS this quarter.

So those are the headlines for the third quarter. I'm not going to dwell on the nine months' figures; they're in the press release. But in brief, revenue was down 3% at constant currency, core operating profit was down 6%, core EPS was up 6% for the year to date.

So returning to the third quarter revenue performance, and when I refer to growth rates they'll all be on a constant currency basis. Revenue in the US was unchanged, compared with the third quarter last year. And that is after absorbing 3.5% of negative impact from US healthcare reform.

Revenue in Western Europe was down 15% in the quarter. That's an acceleration from the first half of run rate, but it is largely due to further volume penetration from generics, particularly for Nexium. Realized price declines remain the mid single-digit level that we saw in the first half. Of course, downward pressures on price will likely continue as the economies continue to struggle.

Revenue in the established Rest of World was up 7% on a good performance in Japan, where launch stocking for Nexium, and continued strong growth for Crestor and Symbicort led to a 10% increase in revenue.

Revenue in emerging markets grew by 7% in the quarter. That's down from the 10% growth rate in the second quarter; there has been some slowdown across the markets. Fundamental drivers of industry growth in these markets will be in place for many years to come, but they're not immune from the near-term impact of current economic conditions across the globe.

In addition, we have a couple of Company-specific factors at play in our third quarter results. In Brazil, we've lost exclusivity for Crestor and Seroquel IR, so our business in Brazil is down 17% in the quarter.

We've also seen a delay in some Government tender orders in the Middle East, but that's a timing difference more than anything else, and that volume should come through in the fourth quarter.

Revenue in China was up 13% in the quarter. We've seen the growth in the overall market slow somewhat, and our portfolio has also seen an impact from lower prices, and some delays in the rate at which the RDL approvals that we've achieved on a national level are being implemented in the regional listings.

Turning now to revenue at the brand level, I'll begin with Crestor. Worldwide sales of Crestor increased by 14% to $1.7 billion. In the US, sales were up 20% to $753 million. Total prescriptions were up 3%, compared with 0.5% for the year total statin market in the US. Crestor's market share of total prescriptions was up some 40 basis points since May, just ahead of the FDA safety advisory for simvastatin that was issues in early June. Our dynamic share is around 15%, and that's a blend of 12% share of new statin starts, and a 20% share of the switch market.

Crestor's sales in the Rest of World were up 9% to $906 million. That represents 55% of total Crestor revenue. As I said earlier, we've got generics in Brazil, and that impacted Crestor's growth in emerging markets where sales were up 7% overall. But there was strong double-digit growth in Japan, Canada and Australia, that's the established Rest of World region. And then, sales in Western Europe were up 2% in the quarter.

Now with generic Lipitor just around the corner, we're often asked how we expect Crestor to perform, particularly in the US. I'm not about to break precedent and start giving product-specific forecasts, but let me describe how we think the overall market will evolve.

First on pricing. In a competitive statin market, where generics already account for nearly 65% of total prescriptions, we've been able to consistently achieve good increases in realized selling prices in the US, reflecting our strong value proposition. However, with the availability of low priced generic atorvastatin, our ability to continue to sustain increases in net prices will come under pressure.

Second, segmenting the market by source of business, currently 94% of Crestor usage is for patients on continued therapy. Despite the availability of many low cost options, these patients are on Crestor because their physician felt it was the right treatment choice for them, in many cases because they've failed to achieve goal on other regimens. And we do not believe that there will be significant switching just because another low cost generic is available.

We think the market share pressure will be on the 6% of the volume which is dynamic; that's around 4% from new starts, and about 2% from patient switches from other therapies. Managed care plan designs already strongly encourage the use of generics by either differentiated co-pays or step therapy requirements for newly diagnosed patients, and a lower priced atorvastatin may be more competitive in this segment.

To the degree to which Lipitor has been a source of net switching to Crestor, that is we gain more from Lipitor than they gain from us, there may be a recalibration of that net dynamic on economic grounds.

We continue to believe that Crestor will still maintain a strong position in the switch segment, as many patients who try other less potent statins will continue to fail to reach treatment goal, and Crestor remains the most effective statin, especially for patients at elevated CV risk.

Turning to the Seroquel franchise, third quarter sales were up 4% to $1.4 billion. In the US, franchise sales in the third quarter were also up 4% to $975 million. Focusing on Seroquel XR, total prescriptions were up 12% in the third quarter, compared with last year, and well ahead of the 2% growth in the atypical antipsychotic market.

In the US, Seroquel XR accounted for 17.3% of franchise prescriptions, and 19% of franchise revenue in the third quarter. Seroquel IR prescriptions were down 5%, so the total franchise was off 2% in total prescriptions in the quarter.

Seroquel franchise sales in the rest of the world were $425 million. That is a 4% increase fuelled by a 33% in Seroquel XR, which now accounts for 43% of franchise sales in these markets.

Symbicort sales were up 9% (technical difficulty).

Ladies and gentlemen, please stay on line. We will try to get the speaker sound back very shortly.

Well, operator, thanks very much. We're not absolutely clear when the line dropped, so what I propose to do is start again at the revenue performance by region. I apologize to those on the call if there's some duplication, but it's probably better to duplicate rather than miss some sections of my remarks. So if we're ready to start, I propose to kick off again. Okay?

Thank you. Go ahead.

Okay. Thanks very much, and our apologies that we seem to have lost the line momentarily. As you probably heard me say, I'll go back and start again when I entered into the discussion of our third quarter revenue performance, and apologize if there's some duplication, but hopefully, this way we'll get the entirety of my remarks.

So returning to the third quarter revenue performance, and I'm going to refer here to constant currency growth rates throughout. Revenue in the US was unchanged, compared with the third quarter last year, and that's after absorbing 3.5% of negative impact from US healthcare reform. Revenue in Western Europe was down 15% in the quarter. That's an acceleration from the first half run rate, but it's largely due to further volume penetration from generics, particularly from Nexium.

Realized price declines remain at the mid single-digit level that we saw in the first half. Of course, downward pressures on price will likely continue as the economies continue to struggle.

Revenue in established Rest of World was up 7% on a good performance in Japan, where launch stocking for Nexium and continued strong growth for Crestor and Symbicort led to a 10% increase in revenue.

Revenue in emerging markets grew by 7% in the quarter. That was down from the 10% growth rate in the second quarter; there has been some slowdown across the markets. The fundamental drivers of industry growth in these markets will be in place for many years to come, but they're not immune from the near-term impact of current economic conditions across the globe.

In addition, we have a couple of Company-specific factors at play in our third quarter results. In Brazil, we've lost exclusivity for Crestor and Seroquel IR, so our business in Brazil is down 17% in the quarter. We've also seen a delay in some Government tender orders in the Middle East, but that's a timing difference more than anything else, and that volume should come through in the fourth quarter.

Revenue in China was up 13% in the quarter. We've seen the growth in the overall market slow somewhat, and our portfolio has also seen an impact from lower prices and some delays in which the RDL approvals that we achieved on a national level are being implemented in the regional listings.

So now turning to revenue at the brand level, and starting with Crestor; worldwide sales of Crestor increased by 14% to $1.7 billion. In the US, sales were up 20% to $753 million. Total prescriptions were up 3%, compared with 0.5% for the total statin market in the US. Crestor's market share of total prescriptions was up some 40 basis points since May, just ahead of the FDA safety advisory for simvastatin that was issued in early June. Our dynamic share is around 15%, and that's a blend of a 12% share of new statin starts, and a 20% share of the switch market.

Crestor sales in the Rest of World were up 9% to $906 million. That represents 55% of total Crestor revenue. As I said earlier, we've got generics in Brazil, and that impacted Crestor's growth in emerging markets where sales were up 7% overall. But there was strong double-digit growth in Japan, Canada and Australia, that's the established Rest of the World region, and then sales in Western Europe, they were up 2% in the quarter.

Now with generic Lipitor just around the corner, we're often asked how we expect Crestor to perform, particularly in the US. I'm not about to break precedent and start giving product-specific forecasts, but let me describe how we think the market will evolve.

First on pricing. In a competitive statin market, where generics already account for nearly 65% of total prescriptions, we've been able to consistently achieve good increases in realized selling prices in the US, reflecting our strong value proposition. However, with the availability of low priced generic atorvastatin, our ability to continue to sustain increases in net prices will come under pressure.

Second, segmenting the market by source of business, currently 94% of Crestor usage is for patients on continued therapy. Now despite the availability of many low cost options, these patients are on Crestor because their physicians felt it was the right treatment choice for them, in many cases, because they failed to achieve goal on other regimens. And we do not believe that there will be significant switching just because another low cost generic is available.

We think the market share pressure will be on the 6% of the volume which is dynamic. It's around 4% for new starts and about 2% from patient switches from other therapies.

Managed care plan designs already strongly encourage the use of generics by either differentiated co-pays or step therapy requirements for newly diagnosed patients, and a lower priced atorvastatin may be more competitive in this segment. To the degree to which Lipitor has been a source of net switching to Crestor, that is we gain more from Lipitor than they gain from us, there may be a recalibration of that net dynamic on economic grounds.

We continue to believe that Crestor will still maintain a strong position in the switch segment, as many patients who try other less potent statins will continue to fail to reach treatment goal. And Crestor remains the most effective statin, especially for patients at elevated CV risk.

Turning to the Seroquel franchise, third quarter sales were up 4%, to $1.4 billion in the US. Franchise sales in the third quarter were also up 4%, to $975 million.

Focusing on Seroquel XR, total prescriptions were up 12% in the third quarter, compared with last year, and well ahead of the 2% growth in the atypical antipsychotic market. In the US, Seroquel XR accounted for 17.3% of franchise prescriptions, and 19% of franchise revenue, in the third quarter. Seroquel IR prescriptions were down 5%, so the total franchise was off 2% in total prescriptions in the quarter.

Seroquel franchise sales in the Rest of World were $425 million, that's a 4% increase, fuelled by a 33% increase in Seroquel XR, which now accounts for 43% of franchise sales in these markets.

Symbicort sales were up 9% in the quarter, to $755 million. In the US, sales in the third quarter were up 15%, to $201 million. Total prescriptions were up 9%, compared with a 2.5% decline in the US market for fixed combination products.

Symbicort's share of total prescriptions reached 19.7% in September, up 2.1 percentage points over September of last year, despite the launch of a new entrant. And market share of patients newly starting combination therapy is 26.6%.

Symbicort sales in the rest of the world were 7% ahead of last year, to $554 million. Sales in Western Europe were up 3%. Sales in established Rest of World increased by 23%, reflecting continued strong growth in Japan, as well as double-digit growth in Canada, and in Australia. Sales in emerging markets were up 9%, largely on growth in emerging European markets.

Alliance revenue for Onglyza were $59 million in the third quarter, of which $44 million was in the US. Total prescriptions for DPP-4 products in the US market were up 22% in the quarter.

Our franchise, which includes Onglyza and Komboglyze XR, has increased its market share of total DPP-4 prescriptions in the US to 15.5% in September, including 3.7% share for Komboglyze XR, since launch at the beginning of the year. Share of new starts for the franchise remains well above this, at around 25%.

We announced last month that we have received a positive opinion from the EU CHMP, for Komboglyze, which is the twice daily, fixed combination of Onglyza and metformin. So we look forward to finally participating in the combination market, some time next year, as we get final approvals and reimbursements in Western Europe.

Turning to Brilinta, sales were $13 million in the quarter, of which $11 million was launch stocking in the US. Now as we've said all along, ex-factory sales and retail prescriptions are a lagging, not a leading indicator of launch progress.

Our launch plan follows a deliberate sequence of steps. Achieve regulatory approval, then negotiating and achieving reimbursement. This is then followed by achieving hospital by hospital access through product stocking, formulary approvals, and adoption on treatment protocols. And only then do we get the opportunity to drive trial and usage at the prescriber level, as new cases of ACS present to the hospital.

During the quarter, we've had some important achievements on the reimbursement front, including a very positive reimbursement recommendation by NICE in the UK, which became final just yesterday. We also have received a positive decision on reimbursement in Australia.

Earlier this month, Brilique received a positive initial assessment in Germany, which concluded that Brilique offers an important additional benefit in relation to the comparator clopidogrel in NSTEMI and unstable angina. That represents about 72% of the ACS population in Germany.

In France, however, we're working up our response to receiving the French Transparency Commission preliminary ASMR assessment rating of 5, a designation of no medical improvement demonstrated, compared with existing patient management options. We believe this preliminary assessment does not reflect the cardiovascular mortality benefit that was demonstrated in the PLATO trial, and has been acknowledged in the German and UK assessments.

We're also very pleased with the inclusion of Brilique in the recently revised treatment guidelines for NSTEMI unstable angina patients issued by the European Society of Cardiology, where Brilique has been placed in a first line position ahead of clopidogrel.

In terms of in-market performance, it's very early days in many markets, but we're making good progress. For example, in Germany, we're making steady progress at hospital stocking and protocol adoption. Brilique is now stocked in around 80% of our target hospitals, and has been adopted on protocols in roughly one-third.

In the US, since launch in mid August, we're also making steady progress, with formulary access at our top 400 hospitals at around 20% so far. In terms of managed care reimbursement, we've unrestricted access to around 60% of covered lives, including nearly 75% in commercial plans. The Medicare Part B process, of course, takes some more time to work through.

So lots of work ahead of us, but good and steady progress on the execution of our [launch] rollout for Brilinta.

A brief word on a couple of the mature brands in the portfolio. Worldwide Nexium sales were just over $1 billion in the quarter, down 16%, with generics in Western Europe increasingly taking a toll, with sales down 50% in the quarter.

Sales of Arimidex were down 44%, to $176 million in the quarter. Sales have largely disappeared in the US market, as generics now account for 96% of prescriptions since they were launched more than 12 months ago. Sales in the Rest of World were down 37% to $168 million in the quarter.

I will now turn to the third quarter P&L, and 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 be on a constant currency basis.

Core gross margin the quarter was 80.4% of sales. That is up 1.2 percentage points, compared with the third quarter last year, which was impacted by the intangible impairment of lesogaberan. For the full year 2010, core gross margin was 81.2% of sales. And for the full year 2011, I still expect core gross margin will be somewhat higher than last year.

Core SG&A expense was down 2%, compared with the third quarter last year. We continue to invest to grow our emerging markets business, as well as for new product launches. We also have the excise packs from US healthcare reform in core SG&A. However, we continue to mitigate these increases through operational efficiencies across our established markets.

I also said, last quarter, that you'd see a different pattern of phasing of SG&A, compared to recent years, and that is coming through in the decline in SG&A in the quarter, compared to the 5% increase in the first half. For the full year of 2011, I expect core SG&A to be broadly flat, in constant currency terms.

Core other income was 5% lower than the third quarter last year. This reflects generic competition for Entocort, and the subsequent termination of the marketing and distribution arrangement with Prometheus. I still expect core other income to be around $700 million for the full year.

That leads to a core pre R&D operating margin of 52.7% of revenue, and that's up 120 basis points in the quarter, chiefly on the gross margin improvement that I mentioned earlier.

Core R&D investment in the quarter was $1.15 billion, a 10% increase, on increased spending on late stage clinical trials, and investment in biologics, partially mitigated by the benefits from restructuring initiatives. Intangible impairments were also a bit higher, compared with last year.

This leads to a core operating profit of just under $3.2 billion in the quarter, 2% lower than last in line with the decline in revenues. Core operating margin was 38.7% of revenue, down 30 basis points.

Turning to our productivity program, we've taken restructuring charges of $221 million in the third quarter. Now we estimated the total cost for this phase of restructuring would be $2 billion. We charged, as you'll recall, $1.2 billion in 2010, and expect most of the remainder to be incurred this year. So the fourth quarter restructuring charge will be even higher than the third quarter run rate.

Let me now turn to cash flow, net cash from operating activities for the nine months was around $2.4 billion lower than last year. That's largely driven by higher tax payments, including those related to the tax settlements announced earlier, and an increase in working capital.

Net cash distributions to shareholders for the nine months increased by 64% to over $7.6 billion through dividend payments of $3.76 billion, and net share repurchases of nearly $3.9 billion. And that's against an initial target of $4 billion in net repurchases for the full year.

When we announced the sale of Astra Tech, we said we would deploy those proceeds in share repurchases. And with the sale completed in August, we're well placed to achieve the revised $5 billion target for the full year, with repurchases funded by any remaining balance of the Astra Tech proceeds to be completed in 2012.

So finally, turning to guidance. We knew that market conditions would be difficult this year, with Government interventions on price, healthcare reform in the US, and generic competition on some important products.

So in this context, I think we've done well in executing on our plans. We continue to drive the performance of brands where we maintain exclusivity; we're investing to drive growth in emerging markets and behind new product launches, but we're creating the headroom for that investment with a relentless focus on productivity and on efficiency.

Based on the performance to date, and the outlook for the rest of the year, revenue for the full year still looks to be in line with our original assumptions, a flat to low single-digit decline on a constant currency basis.

I'm also pleased that we're in a position to increase our target for core EPS for the full year by $0.05, which is largely due to favorable movements in actual exchange rates, compared to the January 2011 rates upon which our guidance was based. That benefit amounted to $0.03 in the third quarter, and I'm comfortable rounding that up to $0.05, given our solid underlying business performance.

We've also narrowed the range, so the new target for the core EPS for the full year is in the range of $7.20 and $7.40 per share. I'd add the usual health warning that this guidance takes no account of the likelihood that average exchange rates for the remainder of the year may differ materially from the January 2011 average.

Our currency sensitivity chart is provided on our website to help you flex your own estimates on the currency impact for sales and earnings.

So I wrap up my formal remarks here, and turn the call back to the conference operator to begin the Q&A session.

(Operator Instructions). Michael Leacock, RBS.

Three brief ones, if I may, Simon? Firstly, in terms of Brilinta your pricing discussions in Germany, and I guess for that matter in France, what sort of timing should we expect for those to be concluded, hopefully successfully?

Secondly, on MEDI-528, is that impairment the entire impairment we're likely to see?

And thirdly, you mentioned Seroquel IR in Brazil facing significant generic competition, is XR available in Brazil and, if so, how did that hold up in the face of IR competition? Thank you.

Thanks Michael for those questions. So Karl, can I ask you to pick up the Brilinta timing one?

In terms of the 528, we have now impaired the total net book value associated with that asset.

In terms of availability of Seroquel XR in Brazil, just checking that. My recollection is it's not yet available, but we'll confirm that on the call.

If you just want to pick up on Brilinta and the sort of timing, Karl.

Yes, hello, Michael. In terms of Brilinta in Germany, as you might know, Brilinta's actually the first product going through the new system. We now have the reimbursement assessment from IQWiG, and we are then going forward and discussing with the insurance companies in Germany. We expect that during the fourth quarter this year and beginning of next year. So that will still take some time.

The same thing in France; we have the initial assessment from the Transparency Commission, but we still aim to go back and give our view of the benefit Brilinta brings. And after that, we will start pricing negotiations. And that will also take some time and most likely go into the beginning of next year.

Thanks, Karl. Michael, I've just checked my tables here. In fact, Seroquel XR has recently become available in Brazil. It's still small, but actually, it did increase during the course of the quarter. Sorry just to go back on that question. Thanks, Michael.

Thank you, Simon.

Tim Anderson, Sanford Bernstein.

On Crestor, at this point in the year, you should have a pretty good idea of how Crestor will be shaping in terms of formulary placement for 2012 in the US. Are you seeing any slippage there as you go into 2012?

Also, you mentioned future price slippage on Crestor in the US. Do you expect that net pricing will actually move into negative year-on-year territory?

Also, is the same pricing dynamic going to happen outside the US, where Lipitor is also starting to go generic?

And then on emerging markets and generic erosion, is it really only Brazil where a loss of exclusivity leads to substantial erosion? Or are you starting to see that in other countries as well?

If I look a product like Arimidex, for example, it's been in negative year-on-year growth territory in emerging markets for quite a few quarters, including this quarter. And I wonder if it calls into question the durability of sales of off-patent medicines in these regions.

Tim, thanks very much; three very good questions. Let me deal with the first one.

In terms of Crestor, we have not seen slippage and change in our formulary placement for Crestor. We continue to hold strong formulary positions in that marketplace. And I think it reflects the strength of Crestor as the most potent statin, particularly for patients with elevated C risk. And that's recognized by our customers.

In terms of Crestor pricing, what I said in my remarks, just to be absolutely clear, is that we've been consistently achieving good increases in net pricing over the recent past. But we recognize that, with low price generic atorvastatin, our ability to continue to sustain price increases will come under pressure. I'm not going to call overall nature and direction of price increase at this stage.

In terms of your question about the loss of exclusivity, and the resulting impact on our brands in emerging markets, as you know, Tim, we put this into emerging markets. But you've got huge differences in these markets; the nature of healthcare; the nature of the reimbursement system from out of pocket through to single government payer; a very broad spread of different price points.

If you take the case in Brazil, we've had loss of exclusivity where we essentially have had generics coming in at a substantially lower price than Crestor, and we have seen, in a strong out of pocket market, some movement to those. But it's been a significant price difference that's required that.

We don't see that same opportunity in all markets, and you see a different competitive dynamic in different markets.

Similarly there, if you look in some of our Eastern European markets, where we had generic rosuvastatin, for example, for some time, we have seen that loss of exclusivity drive reductions in revenue in those markets often driven by public payers.

Equally, we've got some other markets where we've faced loss of exclusivity and seen continued growth of our brand on the back of the value associated with our brand in those markets.

So it's a very varied picture. And what we'll try to do, Tim, as we go forward is obviously where there are different dynamics, call those out for you, as we have done this quarter with Brazil.

So I think there was probably one other question you made on emerging markets; remind me Karl.

Yes, pricing, I think we mentioned my comments on pricing. We've seen continued mid single-digit price declines in Europe this year, and we expect that to be set in the market going forward. So, Tim, thanks for the questions.

Gbola Amusa, UBS.

Just following up on Crestor. You cited the 94% figure being repeat users, and expectations of low amounts of switching to other statins. If that's the case, can you comment on expectations for Crestor volume losses, not on switching, but from yearly attrition related to lack of compliance?

And then, on the overall statins market, can you give a comment, directionally, on whether there will be statins market value expansion if and when ATP 4 guidelines finally do emerge? That's it.

Thanks. Ed, do you want to pick up the --

Yes, I don't have a precise figure at hand, Gbola, but obviously any chronic care therapy, you do see that kind of natural attrition from compliance loss but I, quite frankly, just don't have it at hand. But that's a dynamic you would see with any chronic medication and Crestor's no different than that.

Doesn't that then imply that gains have to be made elsewhere to keep the franchise flat in the US?

Again, we're not trying to solve the equation of what that market dynamic will be and give a direction on product revenues. So yes, I'll leave that to your own assumptions.

And in terms of guidelines, I think the trend around the world is when the guidelines increasingly provide more demanding treatment goals; we expect that to be a continuing theme. And we'd expect that, over time, to lead to increased volumes in the statin market.

Thanks.

Peter Verdult, Morgan Stanley.

Sorry, I've had to jump on from another call, so apologies if I'm repeating an earlier question. But the two I have relate to, firstly, just Crestor so with Lipitor around the corner, could you just remind us of your latest, most up to date thinking in terms of Crestor through 2012 in the US?

And also, an update on the formulary positioning of Crestor, be it on Medicaid, Medicare or commercial programs.

And then just on emerging markets, obviously you've talked about Brazil and Crestor and you've talked about the timing of shipments across MENA impacting the growth rate for emerging markets. Are we to -- how should we read -- can you quantify that impact? And should we expect emerging market growth to trend back to double digit through Q4? Or are there other issues and pricings situations in certain countries that will limit that opportunity shorter term?

Okay, Peter, we did indeed address your first questions relating to Crestor. In answering an earlier question, I explained that we had not seen changes in the formulary placement for Crestor. It remains well positioned with strong formulary access in the US.

And secondly, in my remarks, I did describe the dynamics we see at work, both in terms of pricing and segmentation of use for Crestor.

And my recommendation, rather than repeating that ground, would be to refer you to our website, where there'll be a transcript of my remarks that you can read in your own time.

Certainly for emerging markets, we've seen across the portfolio and, as I mentioned earlier, this is a wide section of different types of markets. Many of them have been impacted by the challenging macroeconomic environment conditions, and I particularly point to some of our Eastern European markets in that respect. And we've also obviously had issues, turbulence, in some of our MENA markets as well.

So we have seen a general slowdown across markets. But in addition to that, as I called out in my remarks, we've seen some specific factors impacting our business, and we've dwelt for a moment on Brazil and the timing. And it really is the timing of tender orders into our Middle East business, we expect that volume to come back in the fourth quarter.

But, fundamentally, when we look at these markets, looking ahead now, we continue to see the fundamentals to be strong. These are markets with growing populations, increasing disposable income, elevated levels of chronic diseases, and we continue to see that as providing strong, underpinning, fundamentals for the growth in pharmaceutical demand in those markets. And hence, we continue, in our business, to be seeing the potential for double-digit growth that we've set out as our midterm planning assumptions. And that remains our view on the opportunity in those markets, and we'll continue to invest hard behind them.

We recognize there'll be some volatility in growth rates from quarter to quarter. I think if you look back into '09 you'll have seen that our quarterly growth rate, from memory, dropped down to about 9%, or even 8%, in one quarter, and then recovered to 14% the following. So you do get some volatility. But what we're focused on in developing our business is to realize the potential of those very strong underpinning fundamentals over the long term.

Okay, thank you.

Kerry Holford, Credit Suisse.

Just a couple of questions on the legal section of your press release. I noted that you've recently filed citizen's petitions with the FDA on both Seroquel IR, and Exol. I just wonder if you can talk a bit as to why you've done that, and what you hope this will achieve with regards to the ultimate generic competition in the US market.

And also, there there's a reference with regard to settling on AWP Litigation, and you say a provision has been made in Q4. I wonder if you're able to tell us the approximate size of the provision in Q4. Many thanks.

Thanks. Just dealing with the first of those. We have indeed filed a citizen's petition for Seroquel and Seroquel XR, essentially seeking that the FDA not approve any generic quetiapine that omits certain warning language from its label. We believe that warning and data that the FDA required us to include in that labeling, should be equally required of a generic label. And, therefore, generics shouldn't be approved that contains this language, because it would violate our three years' data exclusivity rights. So that's the basis of the citizen's petition. The FDA's required to issue a decision on those by, I think, early March 2012. I think 7th from memory. So that hopefully deals with your question on the citizen's petition.

In terms of the AWP, we have continuing discussions with a number of States and have undertaken a number of settlements. We provided against these; I'm not going to dimension the quantities. It's not meaningful material in the overall shape of our financial results and performance.

Thank you.

Brian Bourdo, Barclays Capital.

Some questions please, one on Dapagliflozin, one on TC-5214, and one on Crestor. On Dapagliflozin, given the additional data that you and Bristol-Myers Squibb have submitted to the FDA, is your confidence in receiving approval higher, lower, or unchanged, and why?

On TC-5214, should we still expect to see, or hear, news of phase 3 study results from first studies before the end of this year?

And, sorry to ask a further question on Crestor. I think you responded to Tim Anderson's question about how Crestor is doing in markets where you have lost exclusivity, but could you please give us some color on how Crestor is doing in countries where you still have exclusivity, but Lipitor generics are available and reimbursed please, on the understanding that this may not read across to the US situation at all. And I'm thinking of, say, Spain, Canada and some of those other markets. Thank you very much.

Brian, thanks very much indeed. And let me deal with the Crestor and the Dapa question, and then Karl will pick up TC-5214. And actually, your question on Crestor prompts me that that was the question of Tim's that I didn't answer at the time. I think Tim asked the same question. And to both of you, where we have seen generic Lipitor in a market where Crestor is present, we do have some examples, such as Canada and Spain, where we have seen a continued growth of Crestor we think provides evidence, in those markets, of the strength of the segment that seeks and is prepared to pay the price for. Crestor is the most potent statin.

So those are two markets where we've got that experience of competing with generic atorvastatin, and have continued to perform well. And those are probably the two most significant markets I'd call out. But clearly, I'd say that no market is a perfect analogy for another one, and Crestor's positioning and the dynamics will be different in the US. We've yet to see how that will play out, but we've given you some pointers as to how we think about it in our remarks.

In terms of Dapa, the FDA has extended the action date, as we announced today, by three months. So that puts the new PDUFA date at Jan 28. And obviously, that flows from the fact that, in response to their request for additional data, we were able to submit data from some completed trials. So we're pleased to be able to do that. And we and our partners, BMS, remain absolutely committed to Dapa as a potential new therapeutic option to type 2 diabetes. We're going to continue to work closely with the FDA to support the continued review of the NDA. We think it's an important drug that could bring real value to patients with this very difficult condition.

Karl, TC-5214.

Hello Brian. Yes, you will see the results of the first phase 3 study, which is going to report in the fourth quarter of this year. So currently we have five ongoing phase 3 studies in the renaissance program for TC-5214. And the first one to report is the so-called study number 3, which is a flexible dosing study conducted in Europe which reports now in the fourth quarter. The remaining studies should then report in the first half of next year.

Great, thanks Karl, and thanks for the questions, Brian.

Thank you.

Alexandra Hauber, JPMorgan.

Three questions please. Firstly, on Faslodex; that product is no longer reported in your geographic revenue analysis, but it's now annualizing over $0.5 billion and is growing very fast at 65% year to date. Can you just talk a little bit about the dynamics of that growth? I notice you have approved the double dose, so is it just that all the patients are switched to the double dose and, therefore, ultimately that product is doubling and then goes back to the old growth trajectory? Or actually, are you seeing better adoption based on the confirmed study that has shown a better PFS?

A second question, option 2 is coming up next year and, obviously, you won't tell us what you're going to do. But would you just please give us the pro-argument and the cons-argument for exercising it?

And the third question is, what leverage do you have to reduce SG&A next year when you lose Seroquel IR, given that the Seroquel marketing support is already behind the XR product?

Alexandra, thanks very much indeed for those questions. Ed, would you like to pick up questions on Faslodex which is an important and strongly growing product for us?

Sure. As you mentioned, Alexandra, the principal driver of the very rapid growth has been the conversion of prescribing to the 500 milligram dose, relative to the lower dose. So naturally, that will fuel an above-trend growth rate just from that conversion and upgrade on price. And so once you lap the 12-month mark on that, that separate engine for growth will, obviously, come out of the year-on-year comparisons.

What you'll be left then with is a couple of drivers of growth. We just recently got approval in Japan, so that will be a new geographic penetration. And we're also looking to continue to see Faslodex adopted earlier in the stage of care, which will probably be the growth engine over the long term once we've lapped this accelerated growth phase with the new dosage conversion.

Thanks, Ed. I think it's interesting, Alexandra, you called out a couple of products which we haven't talked as much about. But together, if you take Iressa and Faslodex, almost $800 million for the year to date, and an important part of our oncology franchise.

To Merck, your second question. We do, indeed, have the first decision point on the final exit of the Merck arrangements. We'll look at that decision as we look at all decisions in our business, on the back of the value to our shareholders.

The process, I think, you probably are aware of, which is that there's an appraised value. We'll, obviously, need to consider that value versus our own estimates, and forecasts and views of the future value of the PPI segment. That'll be an important consideration for us. And we'll look at that, as we get into early 2012, and make a decision. And, obviously, we then have a second option that comes through in 2017. But I don't think I can really add more than that, at this point.

And then your final one --

Isn't the arbitrage of the appraised value here much, much smaller than you have for option 1? As in, it's much, much easier to value this one than option 1, because in option 1 you had Brilinta. So therefore, whether you getting this good deal by exercising early may be smaller?

Clearly, it's now carrying a narrower canvas of products and therapeutic areas, so there's relatively fewer drivers. But I won't comment on the -- well, I think you used the word scope for arbitrage. This is a straightforward value decision we'll make at the time, based upon our view of the value of the franchise, and come back and update you on that in --

So then value; value is just an NPV decision, or do you look at value also like how much your share price would benefit from doing a buyback instead?

We compare our decisions on the basis of value. And there are multiple different lenses through which we look at that.

So it's more than NPV?

If we turn to your next question, which is SG&A. I think you asked that question, particularly in the context of the loss of exclusivity on Seroquel IR. But how we look at this really is the same with any significant loss of exclusivity.

There are, clearly, resources directly attributable to that brand and that product, right across the value chain, from sales and marketing, through into our supply chain. And, clearly, the first action one takes is to remove that resource and cost, either redeployed or removed.

The second then is, as part of our ongoing productivity and efficiency improvement initiatives, we're always working hard to ensure that the infrastructure cost and capacity within our business is rightly aligned in any one market to the prevailing business in that market.

And you will have seen, for example, an announcement probably earlier this month, late last month, in the US, where we have taken actions to reduce the organization within the US. And that's typical of actions that we're taking around many of our established markets. And some of that is being reinvested, as you know, in driving growth in our emerging markets; some of it goes to the bottom line, and benefits the margins.

So we'll be looking at Seroquel IR in exactly that same way. Outcome, the directly attributable resources, and we're continuing to focus, to ensure our infrastructure's right sized.

Seamus Fernandez, Leerink Swann.

Maybe just to follow up on Alexandra's question there, with regard to the AstraZeneca Limited partnership. Are there any restrictions? Again, is it truly just an NPV-based decision, or is the AstraZeneca Limited partnership itself providing any restrictions at all, or opportunities for Merck to participate in anything? Particularly, potential M&A type decisions that could be made in the future.

And then, with regard to prospects for M&A, can you just give us your thoughts, as we move forward? It looks to me, when I look at the US infrastructure, that, again, there aren't a lot of substantial new product launches, unless the pipeline really delivers. And it would seem to me like that's something where you could lose a lot of potential leverage, over time. Just wondering how you think about that. Thanks a lot.

Okay. Thanks very much indeed, Seamus. Just following up, therefore, on your question about Merck. At the detailed granular level, there are lots of complex issues around exit from a complex, longstanding, historic relationship, such as Astra Merck. But fundamentally, I think, the strategic position of the Company, we can think about it in quite simple terms. And that is, the appraised value, versus how we see the value part of our business covered within that arrangement.

Part of the value equation is the value associated with increased freedom to operate outside of the Astra Merck relationship. And clearly, that's part of our assessment of the value to us of staying in, or indeed, exiting that arrangement. And that would be part of our consideration. So that, hopefully, deals Merck.

If I can come back to your second question, which is the opportunities in the US to further develop our business, through -- I think the suggestion was in-licensing and, indeed, acquisition, to leverage our capability and infrastructure there.

You're absolutely right that we've got a very strong commercial capability in the US. We are always looking at attractive opportunities to leverage that capability, to bring medicines to patients. Whether that's from our own R&D, and launches such as Onglyza, Kombiglyze, Caprelsa, Brilinta, which we have underway at the moment, or in licensing compounds, collaborating with our peers with compounds. We're always looking at those sorts of opportunities, and that's a core part of our strategy.

But equally, we work hard to ensure that our infrastructure is least cost and flexible, so that we don't strategically have to undertake those types of combinations. Because in all cases, we're focused on taking the right decisions in terms of value.

So hopefully, that answers your two questions.

Thanks a lot.

Mark Clark, Deutsche Bank.

A couple of things. Firstly, on Crestor; I know it's partly going over ground we've discussed, but the difference between prescription growth and value growth in the US has widened very significantly, during the course of 2011. It was about 8% in the first quarter, then rising to 15% and 17% in the last two quarters. And I wonder if you could speak to the dynamics of that. I know it's a combination of price and mix, but if you could give us at least some feel for how that split is. Because, clearly, a large proportion is mix, and that's something that should be an enduring benefit, going forward.

And secondly, just on Zyprexa genericizing, just wondered if you think that that will play any role in the near-term performance of Seroquel in the run-up to patent expiry of the IR, and -- well, we don't know what's going to happen with XL's patent. But certainly, over the next six months, whether you would expect that to have any impact on the franchise? Thank you.

Thanks for the two questions. Let me just start in the question of Zyprexa in the atypicals market, and then, Ed, perhaps you'd like to pick up on Crestor; indeed you may want to add to the Zyprexa issue.

Our experience in the segment is that the patients with these conditions will frequently move across a variety of treatment options. And when their physician finds a treatment option that really is best for them, they tend to want to ensure that their patients remain on that option.

And, therefore, we tend to see less direct impact, or therapeutic substitution, when we see genericization of one molecule; less of an impact on other molecules within the class, than we might see in some other segments. That's certainly been in our experience with recent genericizations in the atypical class in the US. And, for example, with Seroquel, we don't expect that dynamic to change.

Ed, I don't know if you'd add to that, but if not, move on to address the question on Crestor.

No, I think you're right, when [Risperdal] went generic you saw a small uptick in the total molecule for Risperdal, but it was at the margin rather than at any big drive. So I don't think you'd see much of a different dynamic there with Zyprexa.

And then Crestor, the price volume there's always, of course, a bit of noise in there, and I would say, in this quarter, there were probably two products where you saw a little bit of stock movements. Crestor probably benefitted a bit from stocking, so I would add a bit of inventory movements, compared to the year ago period, to the price, and the larger size prescriptions and the non-retail channels to that for the quarter.

Conversely, Seroquel is probably a little bit of destocking, so those are the two products. But it's all in the noise, it's all in what you would normally see in terms of the product movements, but if you look directionally it flattered Crestor's growth rate this quarter, probably hindered Seroquel's a little bit.

But I mean the headline story is that the prevailing dynamic is continued, good volumetric growth for Crestor. But also, as I mentioned in my remarks, we have sustained net price increasing and Crestor, reflecting its value proposition relative to the alternatives. And then, as Ed mentioned, from quarter to quarter we do get the mix and stocking benefits which can run our way or against; this quarter happens to be in our direction.

Okay, thank you.

I think, operator, we've probably got time for just one more question. If there are final questions to come, I'm happy to take one more question.

Mattias Haggblom, Danske Bank Markets.

Given that we now have learnt that patent expiries for sure may hit your emerging markets business as well, are there any specific countries or products that we should be aware of coming up in the very near term?

And secondly, China in particular, was now down at 13%, I think its lowest growth since Q4 '06. Was there destocking effects in Q3 ahead of reforms in September and, hence, will there be stocking effects in Q4 that explains the number and we should take into account?

And thirdly, with your sales in Brazil down 17%, if I'm not mistaken, in the quarter, how do you handle the lost sales when you think about your fixed costs base there? Do you continue to invest and accept a lower margin temporarily, or do actively adjust to maintain and even continue to improve margins in those markets? Thank you.

Okay, good questions. So I don't think there's any significant exploration in emerging markets that I would call out as ones to watch. So I don't think there's further insight I can provide you on that.

I think the second question, in terms of China, no, I think we've seen something of a slowdown in the China market. You'll have seen that from others and you'll have seen it in the overall IMS data.

And then, as I mentioned in my remarks, we have had some particular factors that work on our performance, in particular we have seen some lower prices in one or two of our therapeutic areas. And, as I mentioned, this is probably an important factor for us in terms of momentum, some delays in the rate at which the national RDL approvals were then implemented regionally.

Those are two facts I call out. I wouldn't say there's a stocking dynamic that impacted Q3 and in turn, therefore, would impact Q4.

So that was on the emerging market, on China. And then on your question about Brazil, it's a very similar answer, really, to how we address both the Seroquel IR loss of exclusivity, and the question about how we look at our capability and infrastructure in the US.

We've got very strong sales and marketing capability and market positions. We've built that through sustained investment and development of our capabilities over time. But we are also conscious that we need to be operating as efficiently as we possibly can, and we benchmark all of our functions to drive to top quartile efficiency, and we also looked up a very flexible cost base. So we can adapt to exactly these types of issues, whether it's when we get a loss of exclusivity or, indeed, when we've got a launch to be able to fund, and we want to be able to do that without adding resource.

And exactly the same facts will be at play in Brazil. We're looking to make sure our cost base is variable so we can reduce fixed costs directly attributable to brands and products, keep the margin at a decent rate. But if we got opportunities to invest in products coming through, we will hold that resource in, because it's much better to keep that resource in place to suffer a bit of a penalty on margin for a short period in order to drive growth out into the future.

So it's very much on a market by market basis. But thanks very much indeed for the question, much appreciated. And I think, with that, it brings us to the end of our call.

So let me conclude by thanking you all for joining us on today's call. Let me also apologize for the fact that we lost you a short way in, and particularly if some of you had to listen to my remarks, interesting though they were, twice.

In summary, we've delivered a third quarter performance that's in line with our expectations against a backdrop of difficult market conditions. We continue to invest where we see opportunity to create value, while retaining discipline on operating costs and the allocation of capital.

We continue to drive strong cash flow and cash returns to shareholders, and we're on track to deliver on our revised target of core earnings per share in the range of $7.20 to $7.40 per share.

And with that, I bid you good day.

Thank you, ladies and gentlemen. That concludes your conference today. Thank you for joining, you may now disconnect.