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Operator
Good day, and welcome to today's Bristol-Myers Squibb Company Second Quarter Sales and Earnings Conference Call.
Today's call is being recorded.
At this time, for opening remarks and introductions, I would like to turn the call over to the Vice President of Investor Relations, Mr. John Elicker.
Please go ahead, sir.
John Elicker - Senior Director of Investor Relations
Thanks, Susan.
And good morning, everyone and thanks for joining us this morning.
By now, I'm sure most of you have had a chance to review our release.
It is also posted on our web site.
We have emailed to our IR database, the release as well as supporting financial information.
Again, it is also posted on our web site.
This morning we have with us Peter Dolan, our Chairman and Chief Executive Officer;
Andrew Bonfield, our Chief Financial Officer; and Don Hayden, Executive Vice President.
Peter and Andrew will have some prepared remarks, and then, we'll be able to go to Q&A.
First, I'll take care of the legal requirements.
During this call, we may make various remarks about the Company's future expectations, plans and prospects that constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.
Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors including those discussed in the company's most recent annual report on Form 10-K and in our periodic reports on Form 10-Q.
These documents are available from the SEC, the Bristol-Myers Squibb Web site or from Bristol-Myers Squibb Investor Relations.
In addition, any forward-looking statements represent our estimates only as of today and should not be relied upon as representing our estimates as of any subsequent date.
While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change.
With that, let me turn it over to Peter.
Peter Dolan - Chairman, President & Chief Executive Officer
Thanks, John.
Good morning, everyone.
I want to make a couple of observations about the quarter, and then talk about the period ahead, as we continue to execute our strategy.
Andrew will then take you through the quarter in more detail and discuss some of the opportunities and challenges, as we see over the next few years.
First, as you can see, we had a very strong quarter versus expectations well above First Call consensus.
We continued to build our key brands in our businesses and geographies, with very strong sales growth for Plavix and Avapro/Avalide in particular.
Several of our healthcare lines realized solid growth, as well.
We also continued to make important investments behind our pipeline and growth opportunities.
R&D spend in the quarter increased 19%, with emphasis on our late stage compounds that I'll say more about shortly.
Advertising and promotion spend behind our newly launched products grew, as did sales and marketing, primarily to support our new products and franchises.
We launched three new products Abilify, Reyataz and Erbitux in a 16-month period.
We are pleased with the performance of each of them and believe they have strong prospects going forward.
We've recently gained approval for Abilify for schizophrenia in Europe, and it's off to a strong start there.
Erbitux has been performing quite well, since its launch in late February.
We and Imclone Systems recently announced our intention to file for a head and neck indication for Erbitux in the US in the first half of 2005.
Also, helping us in the quarter was the fact that we haven't seen much generic competition with Taxol in Europe, but, we do expect that to change soon.
We are raising our expectations for 2004 by 10 cents, to $1.60 to $1.65 earnings per share, and we'll continue to pursue additional investment opportunities in our R&D and, business for the remainder of the year to support our activities going forward.
The second point I want to make is, that we're on course executing our strategy.
We continue to align our R&D licensing and marketing priorities around our 10 disease areas, where we seek to build leadership.
To that end, we're advancing our late stage pipeline, and assuming the results of clinical trials continue to be supportive.
We expect to file the Muraglitazar for diabetes, Abatacept for rheumatoid arthritis and Entecavir for hepatitis B in the next six months.
We also expect two compounds, our DPP4 inhibitor for diabetes and LEA29Y for prevention of solid organ transplantation rejection, to transition to Phase III by the end of the year.
That will make a total of seven compounds in Phase III.
The five I just mentioned, plus Ixabepilone for cancer and, the E2F Decoy edifoligide for prevention of vein graft failure.
I should note that our Javlor compound for cancer, licensed earlier this year from Pierre Fabre is in Phase III in Europe.
We're planning to begin studies for Javlor in the US next year.
We'll provide a full update on our pipeline, including Phase III data on Muraglitazar, Abatacept and Entecavir at our R&D Day, which is scheduled for November 17 in New York.
Before then, we may present data on Abatacept at the American College of Rheumatology Meeting, taking October 17th to 21st.
And, data on Entecavir at the meeting of the American Association for the Study of Liver Diseases, taking place October 29th to November 2nd.
Other strategy achievements include, increasing sales and marketing emphasis on specialists and, high value primary care prescribers.
We've made several key organizational changes to support this effort, and are realigning our sale forces accordingly.
In addition, we've begun to selectively pursue collaborative relationships that help us optimize the value of all our assets, particularly those that could benefit from a primary care focus, incremental to our own efforts.
In April, we announced the joint development and commercialization agreement with Merck for Muraglitazar, which is intended in part to help us maximize the product's presence in the primary care market.
That partnership is proceeding well.
And finally, with regard to the strategy, we are working to reduce or hold flat all spending not related to our pipeline and product priorities over the next several years.
We are implementing a number of productivity and rationization initiatives, such as consolidating our medical affairs, IT, and pharmaceutical development, and, rationalizing manufacturing, to help ensure that we have sufficient resources to continue investing in our pipeline and business and meeting our other priorities.
There is good momentum on a number of fronts, and we are encouraged by the business performance in the first half of 2004.
Now, let me turn to the future.
As I said, we made good progress executing against our strategy, and we're now at about the halfway point in a five-year period of significant transition of our RX portfolio.
We'll continue to experience significant exclusivity losses, and our margins will be pressured because of our new product mix in the need to invest behind our inline growth drivers.
Advancing our pipeline and launching new products also will require investments to position the company well for the future.
All this will have an impact on earnings during the next couple of years.
By 2007, we expect sales growth of our new and key inline products to increasingly offset the cumulative impact of exclusivity losses, and earnings to start to grow as well.
We'll likely face only minor new exclusivity losses in the period 2007 to '11, as we deepen our leadership positions in our 10 disease areas.
Several key assumptions are built into this scenario, such as continued strong growth for our inline products, risk adjusted forecast for our late stage pipeline, and of course, continued exclusivity on Plavix, until 2011.
Let me sum up by saying that I believe we are on the right track.
Executing our strategy as planned and, building momentum with our new products in pipeline.
Clearly, the next several years will be critical in this effort, as we work through the remaining transitional period for our portfolio, maintain our significant investments in the pipeline and business, and prepare for new product launches in a future of growth.
And now, let me turn it over to Andrew.
Andrew Bonfield - Chief Financial Officer & Senior Vice President
Thank you Peter, and good morning everybody.
As Peter mentioned, this was another solid quarter.
I'd like to review our results, discuss our full year 2004 expectations, and then briefly touch on our current view of 2005, '06 and '07.
As you will have seen from our release, fully diluted earnings per share for the quarter were 27 cents.
Negatively impacted by 19 cents specified items, primarily the $455 million increase in litigation reserves.
The full reconciliation of GAAP to non-GAAP earnings per share is posted on our web site.
Excluding specified items, fully diluted earnings per share on a non-GAAP basis was 46 cents, well ahead of first call consensus.
Sales were up 6% to $5.4 billion.
The sales performance was altered from the 3% increase in future foreign exchange rate fluctuations, a 2% increase in volume and a 1% impact in price.
Worldwide pharmaceutical sales were up 6%, which included a favorable 4% impact due to foreign exchange.
US Pharmaceutical sales were up 1% to approximately $2.1 billion driven by strong sales of Plavix, Avapro, Erbitux, Reyataz and Abilify.
Sales of these key drivers now represent over 50% of our US business and rose to $1.05 billion versus $633 million in a comparative period last year.
Offsetting this growth were declines in Glucophage XR, Glucovance and Monopril due to the loss of exclusivity.
Wholesaler buying patterns had some impacts on reported sales levels in the quarter.
Specifically for Pravachol, Avapro and Abilify.
Overall inventory levels at the end of the second quarter are down to approximately three weeks from around the one-month level at the end of the first quarter.
International pharmaceutical sales grew by 11% or 3% net of foreign exchange.
The quarter benefited from the fact that we did not see significant generic competition for Taxol in Europe.
We have now started to see increased generic competition in the third quarter.
Now let me move on to a few of our key products.
Worldwide Plavix sales increased 38% to $769 million.
This is on the strength of a 25% increase in US total script volume.
Part of the sales increase is due to federal price count comparison and the impact of wholesaler buying patterns in the comparative of last year.
Worldwide Pravachol sales were $656 million was down 6% or 11% excluding foreign exchange.
As US total scripts were down 9% for the quarter, sales were also negatively impacted by an approximately two-week reduction in US wholesale inventory level.
We reported $122 billion in total revenue for Abilify.
The successful launch continues with the new script share for approximately 9% for the most recent week.
Additionally total scripts for the quarter were over $560,000 for a 15% increase over the first quarter.
Abilify sales were also impacted by wholesale buying patents and we estimate that inventory levels have been to the quarter were down to approximately two weeks.
As you know, we've recently received approval in Europe and have launched Abilify in the UK and Germany.
Price negotiations are going well in other countries and we look forward to the successful European launch.
Sales for Reyataz, our novel protease inhibitor launched in July last year, were $85 million.
Reyataz have now has approximately 23% new script share of the US protease inhibitor marker excluding the ritonavir.
Additionally, Reyataz sales included $20 million in its international revenue as we recently launch in Europe.
During the first quarter, we received approval in launch overtypes for the treatment of refractory colorectal cancer.
We are pleased at the launch and have reported $72 billion in sales for the second quarter.
I would like to remind you that reported sales totally track demand as we just distribute Erbitux throughout the end and that will sales reported on a consolidated basis.
Mead Johnson sales decreased by 2% excluding the add-on nutritionals business, sales grew by 8% with solid growth both domestically and internationally.
Domestically and non-week shares ahead of expectations and international sales were driven by strong nutrient formula in children's nutritionals.
ConvaTec and Medical Imaging both reported strong double-digit growth for the quarter.
Wound Care Erbitux up 21% excluding foreign exchange continues to be a growth driver for ConvaTec and Cardiolite had a strong quarter for medical imaging up 23%.
Now let me move on to a few of the expense lines.
Gross margins in the first quarter were 61.4% compared to 63.9% in the second quarter of last year.
Specified items reduce the gross margin by 1.5%.
Excluding these, the drug declining margins was approximately 1% with OTN reducing margins by 26%.
The gross margin excluding specified items for the worldwide medicines business dropped from 75% in the second quarter of last year to 72%.
The decline is principally due to the loss of higher margin products such as Monopril and the Metformin franchise and the impact of the launch of Erbitux.
Other key brands such as Abilify and Reyataz had a positive margin impact, while Plavix is roughly online with the worldwide medicines margins average and Avapro is slightly less than the average.
We still expect gross margins to decline about 1% for the full year.
Marketing, selling and administration expenses were up 6% due to expansion of the Abilify sales force in the second half of last year, the unfavorable impact of foreign exchange and higher pension expenses.
We still expect SG&A to increase in the mid-to-high single-digit range for the year.
Advertising promotion is roughly flat with increased spending behind Abilify, Reyataz and Erbitux, offset by lowest spending a moment to a brand.
We expect to anything spending to be up low to mid single digits for the year.
Research and development expense increased by 19% to $625 million, excluding the $25 million licensing payment for Javlor, a specified item, R&D increased 15%.
This was primarily driven by spending on increase resources behind development projects including Phase III spending on inhibitor Abatacept and Muraglitazar
We expect full year R&D spending to be up 10 to 12%.
Pharmaceutical R&D spending against pharmaceuticals sales increased 13.6% to 14.7%.
Equity income from affiliates increased $11 billion as a result of favorability in our share of ImClone and an increase in minority interest income received from the sale of Sanofi joint venture products outside the US.
Although foreign exchange had a positive 3% impact on sales, the impact on profits was less and as we hedge our transaction exposures one year in advance.
The losses in closing out our transaction hedges are affected in other income and expense.
Minority interests expense net of taxes was a $128 million, compared to $83 million last year, primarily as a result of the strong growth of Plavix in the US.
The effective tax rate from continued operations before minority interests and income taxes, and excluding specified items in the second quarter increased 21.4% from 20.4% last year.
The rate for the quarter benefited from the settlement of Puerto Rico tax liabilities and the fully estimated rate is now 22.7% compared to the 24.3% used at the end of the first quarter.
This improved earnings by 2 cents in the quarter.
Operating cash flow remains strong and net debt at the end of the quarter was $2.5 billion.
As things mentioned, we now expect that we will exceed that previously issued full year 2004 guidance, $1.50 to $1.55 on an adjusted non-GAAP basis.
We expect that we will exceed previous guidance by approximately 10 cents or in the range $1.60 to $1.65 on an adjusted non-GAAP basis reflecting primarily better than expected performance of approximately 9 cents in the first half of the year.
This revised guidance is subject to a number of uncertainties including the impact to generic competition on Taxol sales, the impact of generic competition on US Parplatin sales and growth trends the three products, including Plavix, Pravachol Abilify, Reyataz and Erbitux.
Including specified items, our 2004 GAAP earnings guidance is now 1.43 to $1.48 reflecting the litigation charge in the quarter.
Again, the full reconciliation is posted on our Web site.
Now let me turn to the outlook for the next three years.
During 2005 and 2006,we'll continue to face exclusivity losses.
We continued to believe that we'll be able to more or less offset these new losses with the growth of our key and pipeline products.
However, we will continue to experience margin pressure as a result of mix changes.
Additionally, we will continue to invest in R&D in support of our late stage pipeline and also planning on investing behind potential new product launches.
As a result, we expect that 2005 and 2006 earnings on an adjusted non-GAAP basis will be somewhat below the current fiscal consensus of $1.49 and $1.46 respectively.
In 2007, based on our current estimates, we expect earnings on an adjusted non-GAAP basis will grow as we enter a period of time when we will likely face only minor exclusivity losses.
During this time period, we will continue to make the dividend a priority and would seek to maintain it.
Of course, I would remind you that the dividend is a board decision taken quarterly.
This is based on several key assumptions.
We maintain US exclusivity for Plavix, growth trends for key products like Plavix, Avapro, Abilify, Erbitux and Reyataz meet our expectations.
I would like to remind that you that three newly launched products are currently ahead of our initial projections and our late stage pipeline meets our risk-adjusted expectation.
In summary our second quarter performance was very strong.
Our newly-launched products are performing well.
We are investing for the future.
We've increased our expectations for 2004.
And we have also tried to give you an idea of how we are looking at the next three-year period.
Now we are ready for your questions and I'll hand it back over to John.
John Elicker - Senior Director of Investor Relations
Thanks, Andrew.
Susan, I think we're ready to go to Q-and-A.
In the interests of time and an attempt to get as many questions in as possible, we ask that you limit your questions to one.
Susan, we're ready to go.
Operator
Thank you. [OPERATIOR INSTRUCTIONS] And, we'll take our first question from Mara Goldstein with CIBC World Markets.
Mara Goldstein - Analyst
Thank you very much.
I have a question with respect to Bristol's strategies at this is point in time.
You've identified 10 therapeutic areas as core areas for the company but it would seem that if Bristol is striving to build operating leverage in the P&L, that such a diverse approach to R&D with covering 10 therapeutic categories might dilute that and enhance the reliance on larger blockbuster type products.
Can you talk to that for a few minutes?
Peter Dolan - Chairman, President & Chief Executive Officer
Mara, we don't see it diluting or diffusing our R&D effort.
We actually see it as focusing our R&D effort on those core 10 disease areas.
We reduced, as we looked at our pipeline, we reduced it from a much larger number in terms of discovery and development projects we had to focus on those 10 therapeutic areas where we thought we had the most potential to take advantage of assets that we currently have in our pipeline where we could license in compounds and, where we had a current business.
So in aggregate, we actually think this is providing significantly more focus, both to our discovery and development efforts and it allows to us focus on areas of significant unmet medical need.
Andrew Bonfield - Chief Financial Officer & Senior Vice President
And Mara, also on your question on operating leverage, we believe our focus is on specialists and high prescribing primary care physicians will enable to us leverage effectively and efficiently as we look forward to the future.
John Elicker - Senior Director of Investor Relations
Thanks Mara, Susan can we go to our next question, please?
Operator
We'll now hear from Tim Anderson with Prudential Securities.
Timothy Anderson - Analyst
Hi, I'm wondering if you can talk about the kind of the buzz in the marketplace, that there might be some significant layoffs within the organization near term.
Is that the realignment you mentioned at the first part of the call?
And as you kind of go through this realignment process, and shift away from primary care products which you've talked about in the past, with something like Pravachol given your relatively cautious view of the future of this product, have you or will you start to pull back promotional spend in something like the current year?
Donald Hayden - Executive Vice President
Tim, this is Don.
And let me just provide a little bit of perspective around your question.
We have been engaged for the last two years or so in a realignment and repositioning of our organization in a number of different ways.
I think as Peter referenced in his opening remarks, in our headquarters organization, we've been working to focus and consolidate the organization in areas like medical affairs and information technology and our pharmaceutical development organization.
That obviously has and will continue to prompt changes in the size and structure of those groups.
We're doing the same in our manufacturing network, where we're focused on quality compliance and cost and at the same time, working to build capabilities in areas that will support our strategy going forward.
Areas like biologics and sterile manufacturing.
And at the same time, restructuring around those areas that have historically been larger areas force in manufacturing like tablet and capsule small molecules.
In our selling organizations, in the US for the last two years, we've been realigning, going from an organization that had a total of about 4,500 to 5,000 people, two-thirds of whom were primary care based to, today, an organization that is about 4,000 and, about a 50/50 split of specialty and primary care.
We've built a 600-plus person sales organization in neuroscience.
We've increased the size of our cardiovascular specialty organization.
And strengthened oncology and virology, and at the same time reduced the size of primary care.
Going forward, I would expect that will even more sharply focus our primary care organization, transforming it into a cardiovascular metabolic specialty team.
And that's work that will continue as we go through the rest of this year in preparation for the portfolio products that come online over the next two to three years.
So it has been an ongoing process.
It is built around our strategy and our portfolio.
And we've been working to reallocate and reposition resources, wherever possible.
John Elicker - Senior Director of Investor Relations
Thanks, Tim.
Susan, can we go to the next question, please?
Operator
We'll now move on to David Risinger, Merrill Lynch.
David Risinger - Analyst
Thanks very much.
My question is for Peter and Andrew.
Could you help us frame the Plavix related risk?
I'm assuming that you can't give us a specific Plavix earnings contribution, '05, but if you could help us frame that issue and maybe also talk a little about contingency planning, please.
Andrew Bonfield - Chief Financial Officer & Senior Vice President
David, as I indicated in my remarks, Plavix's gross margin is marginally above the average for the worldwide medicines business, which is around 72%.
As we look forward, our plans for 2005 to 2007 are obviously predicated on the assumptions about the portfolio we now have and will create through new product launches.
Plavix is the largest product in the Company.
It is obviously critical to these plans.
We anticipate a trial sometime in the first quarter, first half of 2005.We in Sanofi continue to believe that the patent is valid and infringed and we will strongly defend it.
An adverse outcome would cause to us reevaluate all operational and financial needs.
We are developing Contingency Plans that would take all this into account and would share that with you if it ever becomes necessary.
John Elicker - Senior Director of Investor Relations
Thanks David.
And I think Don wanted to add something to Tim Anderson's question on Pravachol.
Donald Hayden - Executive Vice President
Tim had asked about Pravachol and where it fits into our plans for continuing to strongly support Pravachol in the market this year.
We would expect to, even with our realigned organization, continue to do that into 2005.
Obviously, as we look at the potential loss of exclusivity on Pravacholin the US market in April of 2006, we're looking to maximize the value of Pravachol as we move out overtime.
But we still see it as an important part of our portfolio and an important product for literally millions of patients that may benefit from Pravachol therapy.
So, we're building our planning around Pravachol for the remainder of this year and as we move into next year.
John Elicker - Senior Director of Investor Relations
Thanks.
Susan, can we go to the next question, please?
Operator
We'll now hear from Carl Seiden with UBS.
Carl Seiden - Analyst
Thanks very much.
I'm wondering if you could give a little bit more detail on the roll-out plans for Abilify in Europe and what market you expect to be launching and when?
And qualitatively, I've heard a general feeling that the focus on relative side effects among the atypicals is not as great in Europe as it is in the US.
And I'm wondering if you could say the degree to which you think that is true and how it might affect the ramp-up compared what we saw in the US?
Thanks.
Peter Dolan - Chairman, President & Chief Executive Officer
Carl, so far, Abilify has been launched in the UK, in Germany and in Switzerland.
Early results are encouraging.
We're clearly optimistic about the product.
But it is really pretty early to be drawing any conclusions about it.
Donald Hayden - Executive Vice President
And Carl, on the relative positioning of side effects, the uptake of atypicals in total in Europe is certainly accelerated as we look at the last few years.
And in our market research in Europe, the feedback was that this is certainly an area of growing interest and as Peter said, I think the initial results give us encouragement that we have a lot of work to do yet to understand, how this will play out in Europe over the next few years.
But the early read is encouraging.
John Elicker - Senior Director of Investor Relations
Thanks Carl.
Susan, can we go to the next question?
Operator
We'll take our next question from Jami Rubin with Morgan Stanley
Jami Rubin - Analyst
Thank you.
The question relates to tenancy Aventis merger and wondering if you could talk about how that merger might change there relationship or the existing JV and specifically, obviously with the merger, there will be a change in resource levels related to Plavix and Avapro.
And how will that change from resource level for tenancy impact a profitory equation behind the joint venture?
Thanks.
Peter Dolan - Chairman, President & Chief Executive Officer
The tenancy Aventis merger doesn't impact the structure of the agreement that we have with Sanofi in any way.
Plavix and Avapro, Avalide continue to be very important to our growth plans.
We continue to put resources behind them.
And this combination does not have an impact on our company.
Jami Rubin - Analyst
Peter, if you could follow up, would an increased amount of spend on the part of Sanofi, do have to match that spin or do you have to match the number of details?
Donald Hayden - Executive Vice President
Yes, Jamie, I'll take the question.
It is Don.
We're engaged in our work with Sanofi around planning for 2005.
And we've been working as we have in the prior years in a very collaborative way.
So the emergence Sanofi, Aventis hasn't changed the way we're working together.
Nor our expectations for the way we'll continue to work together going forward.
John Elicker - Senior Director of Investor Relations
Great.
Susan, can we go to the next question, please?
Operator
And, we'll take our next question from Richard Evans with Stanford Bernstein.
Richard Evans - Analyst
First and second question.
Can you help us understand where sale force structuring account is going in the 2005-2007 time frame?
Could you clearly in to back drop in merit what is our deal, it resigns over the part of the logic of that deal being to relieve the burden on the company of heavy primary care infrastructure.
To what extent can we expect that to be reflected in sales structure and headcount going forward?
Donald Hayden - Executive Vice President
Yes.
Richard, it's Don.
I'll try to add to my earlier comments around this.
I think in term of the US market structure, I would expect that our sales force total headcount and structure will continue to move toward a stronger specialty organ orientation.
As we look toward the launcher products like Entecavir, the expansion of our oncology portfolio and possibly other largely specialty driven products, that's an area where we may look to build and strengthen an increase overtime.
As we transition our primary care organization to a team that is more squarely focused on cardiovascular metabolics, it is likely the size of that group will decline.
In total, as you lookout over three years, it is hard to say.
It depends on the evolution of the portfolio.
But we'll certainly be moving to a stronger specialty mix with a retained emphasis on hyper striving primary care physicians.
Peter Dolan - Chairman, President & Chief Executive Officer
From around the world perspective, we're also aligning our sales forces outside the United States as well with our portfolio, with our disease areas, and with the new products that we're launching from a strategic standpoint, our focus on specialists and high prescribing primary care physicians is really driving our action plan in the US and around the world.
John Elicker - Senior Director of Investor Relations
OK.
Susan, we can go to the next question, please.
Operator
And we'll now hear from Tony Butler with Lehman Brothers.
Anthony Butler - Analyst
Yes, good morning.
The sales of Abilify in the second quarter compared to the first were clearly down.
Is this solely related to inventory, which was worked down and more importantly, can you comment as to pricing in this market or in this category with respect to its ability to stick?
Thanks.
Donald Hayden - Executive Vice President
Tony, this is Don.
I think we were actually encouraged by what we saw with Abilify performance during the second quarter in term of total prescription demand for the product in the US.
Our new RX share, which started the year down around 7 is now up over 9.
Total RX shares is approaching 8%.
As you look at the most recent information.
We saw a good prescription growth quarter-on-quarter total RX's in the second quarter as compared to the first, were up 15%.
And actually, if you look at in market sales for Abilify in the second quarter, translating the alliance revenue into end market sales to brands now annualizing at around $750 million a year in the US, and continuing to grow strongly.
So, we've actually been encouraged by what we've seen in the recent trends around the product.
In term of inventory levels with Abilify, we did see some decline in inventory from the end of the first quarter tote end of the second quarter.
Abilify inventory levels as we left the quarter were slightly more than two weeks on hand.
John Elicker - Senior Director of Investor Relations
Thanks Tony.
Susan, can we go to the next question please.
Operator
And we'll take our next question from Mario Corso, Summer Street Research.
Mario Corso - Analyst
Yes.
Thanks for taking my question.
Just a question on 2005 and 2006, in the absence of giving specific number, is there anything you can say now about, in term of growth or decline, which of those two years looks like it there be more difficult in term of earnings per share?
Thank you.
Peter Dolan - Chairman, President & Chief Executive Officer
No.
We actually believe it's been quite helpful as we're in this period of significant transition in our Rx portfolio to be providing, as we have in the past, and communicating an outlook for exclusivity losses.
As we completed our strategic plan for the next several years, and as we looked at '05, '06 and '07, we thought it would be useful to use this as an opportunity to give you an update on how we're thinking about the next three years, '05, '06 and '07.
All of that's done prior to our budget planning for 2005 or 2006, obviously.
But based on the information we had through our strategic plan, we thought it a good time to give you an update on how we saw '05, '06 and '07 developing.
We haven't put a budget together for '05.
We plan to come back and provide more guidance as we have in the past at the end of this year.
But, we wanted to give an update on how we were viewing our portfolio and our pipeline prospects over the next few years.
John Elicker - Senior Director of Investor Relations
Thanks Mario.
Susan, can we go to the next question, please.
Operator
And we'll now move on to David Moskowitz with Friedman, Billings and Ramsey.
David Moskowitz - Analyst
Yes.
Thanks.
My main question is, on Taxol outside the US, you're expecting generic competition to start ramping.
Can you talk to us about the pricing environment there?
We saw what happened in the US where pricing was significantly lower.
Is that going -- do you think that's going to happen overseas, and just real quick, if you could give us some guidance on the tax rate going forward, I'll appreciate that?
Thanks.
Andrew Bonfield - Chief Financial Officer & Senior Vice President
As we look at the tax rate for this year, as I mentioned in my comments, the rates for the quarter -- the year, say it was around 22.7%.
We will continue to review that as we go through the remainder of this year.
And obviously make any change and update you as we go through the opposing process.
As we look forward over the next couple of years, there will be some changes because of sourcing, particularly, with the loss of offshore revenues.
We lose some 936 benefits next year and we also lose the benefit of Paraplatin manufacturing.
So that will -- it would likely be that this year would be low as far as the tax rate is concerned.
But as we said, we're still working through our budgeting process and that will be, we'll give you further guidance on that later in the year.
Peter Dolan - Chairman, President & Chief Executive Officer
And on the Taxol and Europe question, Taxol lost data exclusivity in Europe in the third quarter of 2003.
We began to see some generic competition in some of the key countries during the second quarter.
Through this point, sales attacks on Europe had been quite strong for the company.
While we expect generic competition will have a negative impact on Taxol sales, we're obviously working with doctors to maximize its value and it is really not appropriate for us to comment on pricing plans.
John Elicker - Senior Director of Investor Relations
Thanks David.
Susan, we have time for a couple more questions.
Operator
OK.
And now we'll hear from Burt Hazlett with SunTrust.
Robert Hazlett - Analyst
Thanks.
Thanks for taking my question.
My question is on the timing of the diabetes compounds in the pipeline.
On the DPP4 inhibitor, just moving into Phase III, how long do you think that Phase III program might take?
And secondly, have you made a decision -- a Phase III decision on long-acting insulin?
Thanks.
Peter Dolan - Chairman, President & Chief Executive Officer
DPP4 is currently in Phase II.
It's moving into Phase III.
We're going to present more data, at our R&D Day on November 17th.
Donald Hayden - Executive Vice President
Yes.
And I think, Burt, the question on Basulin, once a day injectable insulin product that we licensed from Flamel, it's currently in Phase II development, and we're reviewing data as it becomes available from those trials.
John Elicker - Senior Director of Investor Relations
Thanks Burt.
And, I think we have time for just one more question.
Susan.
Operator
OK.
For the last question, we'll to go Christopher Sylvester with Schwab SoundView.
Christopher Sylvester - Analyst
Hi.
Thanks for taking my question.
I guess it relates more to the comment on the dividend, the priority being there.
Does your guidance going forward assume that you have to increase the leverage to perhaps do some licensing?
And what would it take for a dividend cut.
Would it have to be as dramatic as a Plavix patent loss or could it be something else a little bit less severe?
Andrew Bonfield - Chief Financial Officer & Senior Vice President
As we look forward, obviously, we continue to believe licensing is a key part of our strategy.
I would note that we had managed to do as many licensing deals as we have done over the past 18 months, at the as continuing to reduce net debt.
I don't see licensing as being an inhibitor to payment of the dividend.
We've continued to manage that.
I think that would have to be something as dramatic as the Plavix patent issue that would cause us to review our dividend policy and others financial and operational policies at the same time.
John Elicker - Senior Director of Investor Relations
Great.
OK.
Thanks everybody.
That's about all the time we have.
Susan and I will be available through normal channels to answer any follow-up questions you may have.
And again, thanks for joining us on the conference call today.
Susan.
Operator
That concludes today's conference.
Thank you for your participation.
You may disconnect at this time.