輝瑞 (PFE) 2016 Q2 法說會逐字稿

Good day, everyone, and welcome to Pfizer's second-quarter 2016 earnings conference call. Today's call is being recorded. At this time, I would like to turn the call over to Mr. Chuck Triano, Senior Vice President of Investor Relations. Please go ahead, sir.

Thank you, operator. Good morning and thanks for joining us today to review Pfizer's second-quarter 2016 performance. As usual, I'm joined today by our Chairman and CEO, Ian Read; Frank D'Amelio, our CFO; Mikael Dolsten, President of Worldwide Research and Development; Albert Bourla, President of Pfizer Innovative Health; John Young, President of Pfizer Essential Health; and Doug Lankler, our General Counsel.

The slides that will be presented on the call can be viewed on our homepage www.Pfizer.com by clicking on the link for Pfizer Quarterly Corporate Performance - Second Quarter 2016, and this is located in the For Investors section, which is in the lower right-hand corner of the page.

Before we start I'd like to remind you that our discussion during this call will include forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those projected in any forward-looking statements. Additional information regarding these factors is discussed under the disclosure notice section in the earnings press release we issued this morning as well as in Pfizer's 2015 annual report on Form 10-K, included in Part I, item 1A: Risk Factors. And this is filed with the Securities and Exchange Commission, available at SEC.gov and at the Pfizer website, Pfizer.com. Forward-looking statements during this conference call speak only as of the original date of this call and we undertake no obligation to update or revise any of these statements.

In addition, discussions during the call will also include certain financial measures that were not prepared in accordance with US generally accepted accounting principles. Reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures can be found in Pfizer's current report on Form 8-K dated today, August 2, 2016. Any non-GAAP measures presented are not and should not be viewed as substitutes for financial measures required by US GAAP; they have no standardized meaning prescribed by US GAAP, and may not be comparable to the calculations of similar measures at other companies.

We will now make prepared remarks, then we will move to a Q&A session. With that, I would now turn the call over to Ian Read.

Thank you, Chuck, and thank you for joining our call this morning.

During my remarks I will briefly talk about the performance of the business and provide some thoughts regarding each of our businesses and our pipeline. Our financial performance year to date is strong. Even stripping out the impact of the legacy Hospira business, we reported another quarter of operational revenue growth that is driving our solid EPS performance. We achieved this through continued strong performance of new products, in addition to patent-protected products that are later in their lifecycle, as well as operational growth in emerging markets. This was accomplished despite some continued headwinds from products' loss of exclusivity.

As you know, to ensure the appropriate level of focus and autonomy, we have evolved our operating model into two distinct businesses: the innovative business we now call Pfizer Innovative Health; and an established products business we now call Pfizer Essential Health. Through the first six months of the year the businesses are executing well against their strategies, as demonstrated by each unit's results. A few words about each.

At Pfizer Innovative Health we continuously strengthen our core brands, including Ibrance, Eliquis, Xeljanz, Lyrica, and Chantix. More specifically, Xeljanz has been prescribed to more than 50,000 patients worldwide. The revenues for the quarter were $217 million, which represents 70% operational growth versus quarter 2, 2015. Eliquis utilization adoption continues to rapidly increase. More than 3.5 million patients already have been prescribed Eliquis. It is now the number one prescribed oral anticoagulant among cardiologists in the US, Japan, and several European countries. As our partner, Bristol Myers, reported, revenues in the second quarter were strong, representing 75% operational year-over-year growth and 90% year-to-date operational growth.

Regarding Ibrance, approximately 35,000 patients have now been treated with, by 7,600 prescribers since its launch in February last year. And it has now been approved in 14 countries in addition to the US. We anticipate receiving a decision from EU regulators around the end of the year. In Q2 we achieved revenues of $514 million and for the first six months of the year totaled $942 million.

Our Prevnar 13 franchise continues to be a significant contributor. With the success of our adult launch in the US, approximately 40% of the adult 65 and plus population have been vaccinated as of the end of June. Achieving year-over-year growth is now more difficult because of a reduction in the number of US adults over 65 who have not received their Prevnar 13 shot. We do, however, expect overall global Prevnar franchise sales for the full year will be comparable to slightly below 2015 levels.

During the quarter we closed the Anacor acquisition, which is a nice complement to our inflammation/immunology portfolio within the Innovative business. The Anacor acquisition is a great example of the type of opportunistic bolt on acquisition that augments our portfolio with a pipeline product that is potentially close to market launch.

In terms of the pipeline, we believe there are significant late stage opportunities in the innovative business in key areas such as Immuno-Oncology, CV/metabolic, vaccines, I&I, rare diseases, neuroscience, and pain. In Immuno-Oncology we have started Phase 3 studies for avelumab in bladder and ovarian cancer, adding to numerous existing studies already underway for the compound.

Together with our partner Merck KGaA, we plan to file avelumab for the treatment of metastatic Merkel cell carcinoma at the end of quarter 3, 2016 in the US, and by the end of 2016 in the EU. In CAR-T we are working with Servier on a joint clinical development program or UCART19, a product developed by Cellectis. We have exclusive rights from Servier to develop and commercialize UCART19 in the United States. And in June, Cellectis announced the first patient was treated in a Phase 1 pediatric B-cell acute lymphoblastic leukemia trial, marking the first clinical trial of UCART19.

And last week we expanded our Immuno-Oncology portfolio by entering into a development collaboration license and option agreement with Western Oncolytics. We will collaborate with them on the preclinical and clinical development of a novel oncolytic vaccinia virus, WO-12, through Phase 1 trials. Following the completion of the Phase 1 trial, we have an exclusive option to acquire WO-12.

Under our Oncology portfolio we completed our Phase 3 study for inotuzumab in adult patients with relapsed or refractory CD22-positive acute lymphoblastic leukemia. Based on the study's results, we are planning to pursue regular submissions; and if approved, inotuzumab could be a valuable new addition to challenge available treatment options for these patients. Currently, adult patients with relapsed or refractory acute lymphoblastic leukemia have a five-year survival rate of less than 10%, making these patients particularly difficult to treat.

We're also continuing to see success with Xalkori. It is now the first and only FDA-approved biomarker-driven therapy for the treatment of ROS1-positive metastatic non-small-cell cancer. In a clinical trial of 50 patients, two-thirds responded to the treatment, and the medium durational response exceeded 1.5 years. While the patient population is limited, it is an important advancement for patients who previously had limited treatment options. In July, CHMP adopted a positive opinion recommending extension of the current indication for Xalkori to also include treatment of adults who have ROS-positive advanced non-small-cell lung cancer. This recommendation will now be reviewed by the European Commission.

In vaccines we have two preventative vaccines, Staphylococcus aureus and Clostridium difficile, in Phase 2 clinical development. We expect to have C. difficile Phase 2 data towards the end of this year.

In inflammation and immunology, the Anacor acquisition has brought us crisaborole. It is an important potential first-line treatment option for the 18 million to 25 million children and adults in the US who have mild to moderate atopic dermatitis. If approved, this would be a meaningful advancement for these patients, who have not seen new treatment options for their condition in the last 15 years. Last month the detailed results from the pivotal Phase 3 study were published in a peer-reviewed journal and a new drug application is currently under review by the US FDA with an expected action date in January 2017.

For Xeljanz, we have recently announced positive top line results from the third Phase 3 trial of Xeljanz for patients with moderately to severe active ulcerative colitis. The combined findings from the Phase 3 pivotal trial are encouraging and provide evidence that Xeljanz has the potential to be an effective new treatment option that both induces and maintains remission in UC. We also announced results from two pivotal trials in Xeljanz for use in patients with psoriatic arthritis. The two psoriatic arthritis studies, along with a long-term extension study, are expected to form the potential submission package for possible future regulatory applications.

In pain, we've begun enrollment in all the Phase 3 tanezumab study. This program consists of six studies and approximately 7,000 patients in three chronic pain conditions -- three in osteoarthritis, two in chronic low back pain, and one in cancer pain. The study results are projected to begin reporting out in 2018.

We also are strengthening our gene therapy capabilities. Yesterday we announced the acquisition of Bamboo, a privately held biotech company based in Chapel Hill, North Carolina, focused on developing gene therapies for the treatment of patients with rare diseases. The acquisition complements our growing rare disease portfolio with preclinical assets including potential therapies for Duchenne muscular dystrophy and Friedreich's Ataxia.

In addition, we are making good progress in hematology, including a Phase 3 study in sickle cell disease. With our partner Spark, we recently presented data to the World Federation of Hemophilia Congress and have received breakthrough designation for SPK-9001, which is currently being investigated in an ongoing Phase 1/2 trial as potential one-time treatment for hemophilia B.

Turning now to Pfizer Essential Health, the business continues to move closer to stabilizing its revenue base. Excluding the impact of Hospira, the legacy Essential Health business was nearly flat on an operational revenue basis for the first half of the year as compared to a year ago. We continue to expect that this business has the potential to move to operational growth through a combination of expanded Biosimilars and Sterile Injectables portfolios. Much of this is aided by the Hospira acquisition, along with continued growth in emerging markets, which grew by 4% operationally in the second quarter without Hospira and other core areas where the business is a global leader such as anti-infectives.

Of note, we are now the worldwide leader in biosimilars according to IMS revenue. We expect to compete in the first wave of biosimilar launches in the US. And recently we announced our investment to develop a state-of-the-art global biotechnology center in Hangzhou Economic Development Area in China. This innovative facility will ensure the development and manufacture of high-quality affordable biosimilar medicines and have the potential to benefit patients both in China and throughout the world. And to potentially further enhance the revenue growth in this business we will continue to actively manage and reshape our portfolio. Our overreaching objective with Pfizer Essential Health has not changed: to generate a modest but sustainable rate of revenue growth. I believe the business is on a good trajectory and we are taking the actions that will help enable us to achieve this goal.

Turning now to a few comments regarding a potential split of the Company. As we have previously said, we are assessing the merits of separation and expect to arrive at a decision no later than the end of this year. Let me add, this is not a make-or-break decision for the Company. As I have just shared with you, each of our businesses is performing well, and we will continue to pursue the strategies, including opportunistic business developments where appropriate to accelerate our strategy, a strategy that will best position them for long-term success.

As a reminder, our decision criteria for split of the business has not changed. It continues to be based on four questions. Are the businesses doing well within Pfizer? Could the businesses perform well as standalone entities? Is there trapped value in a combined entity? And can the trapped value be unlocked efficiently? We will be thoughtful in evaluating the virtues of a split over the coming months. Our key and primary motivation here is shareholder value and return to shareholders. I don't view there being a wrong answer here. The decision will be taken with straightforward context on the best footpath forward for shareholder value.

In summary, we ended the second half of the year with positive momentum that is positioning us to deliver solid performance for the remainder of the year. Now I'll turn it over to Frank, who will go into greater details of the results for the quarter. Thank you.

Thanks, Ian. Good day, everyone.

As always, the charts I'm reviewing today are included in our webcast. As a reminder, because we completed the acquisition of Hospira on September 3, 2015, Pfizer's second-quarter and first-half 2016 financial results include Hospira global operations, while the comparable prior year periods do not include any legacy Hospira operations.

Now moving on to the financials, second-quarter revenues were approximately $13.1 billion, and reflect year-over-year operational growth of $1.6 billion, or 13%, which was partially offset by the unfavorable impact of foreign exchange of $302 million, or 3%. Legacy Hospira operations contributed $1.1 billion to revenues. If you exclude foreign exchange and the contribution from the legacy Hospira operations, Pfizer standalone revenues grew operationally by $458 million, or 4%.

In developed markets, operational revenue growth of $1.5 billion, or 17%, was driven by legacy Hospira operations and the continued strong performance of Ibrance, Eliquis, Xeljanz, and Lyrica, which were partially offset by expected lower revenues from Prevnar 13 Adult in the US due to the high initial capture rate after its launch in the fourth quarter of 2014, resulting in a smaller catch-up opportunity versus the year-ago quarter, product losses of exclusivity, and the expiration of the collaboration agreement to co-promote in the US.

In emerging markets, operational revenue growth of $116 million, or 4%, was driven by legacy Hospira operations and certain Essential Health products, primarily in China, which were partially offset by lower revenues for Prevnar 13 due to the timing of purchases from Gavi and the Vaccine Alliance and in certain other emerging markets.

Second-quarter reported diluted EPS was $0.33 compared with $0.42 in the year-ago quarter due to higher asset impairment charges, product losses of exclusivity, foreign exchange, higher charges for legal matters, and the Allergan termination fee; which were partially offset by increased revenues from certain new, inline, and acquired products as well as a lower effective tax rate. Second-quarter adjusted diluted EPS was $0.64 versus $0.56 in the year-ago quarter. The increase was primarily due to increased revenues, a lower effective tax rate, and fewer diluted weighted average shares outstanding, which declined by 106 million shares versus the year-ago quarter, due to our share repurchase program; which were partially offset by an aggregate operational increase in adjusted cost of sales, adjusted SI&A expenses, and adjusted R&D expenses of $913 million, or 13%, which includes the addition of Hospira operations in 2016, a $0.06 negative impact due to foreign exchange and continuing product losses of exclusivity.

I want to point out that second quarter adjusted cost of sales as a percentage of revenues increased year over year from 17.9% to 23.3%, primarily due to foreign exchange and the addition of legacy Hospira operations. Also, because foreign exchange increased cost of sales while decreasing revenues at the same time, which is atypical, there was an exaggerated increase of our adjusted cost of sales as a percentage of revenues in the second quarter. Excluding the foreign-exchange impact, adjusted second-quarter cost of sales as a percentage of revenue would have been 21.3%. We believe that this is an anomaly rather than a trend, and we have maintained our 2016 adjusted cost of sales as a percentage of revenue guidance.

Foreign exchange negatively impacted second-quarter revenues by approximately $302 million, or 3%, and negatively impacted the net of adjusted cost of sales, adjusted SI&A expenses, and adjusted R&D expenses by $106 million, or 1%. As a result, foreign exchange negatively impacted second-quarter adjusted diluted EPS by approximately $0.06 compared with the year-ago quarter. As you can see on the chart, we are reaffirming revenues on adjusted components of our 2016 financial guidance based on our strong performance to date and continued confidence in the business going forward.

Moving on to key takeaways, we achieved another quarter of operational revenue growth driven by the inclusion of legacy Hospira operations, new products that are early in their life cycle such as Ibrance, Eliquis, and Xeljanz, as well as the solid performance of Lyrica. We reaffirm 2016 revenue and adjusted diluted EPS financial guidance. We announced and completed the acquisition of Anacor Pharmaceuticals and accomplished several key product and pipeline milestones; and we returned $8.7 billion to shareholders in the first half of 2016 through dividends and share repurchases, including a $5 billion accelerated share repurchase agreement. Finally, we remain committed to delivering attractive shareholder returns in 2016 and beyond.

Now I will turn it back to Chuck.

Thank you, Ian and Frank, for the review. Now, Operator, if you could please poll for questions.

(Operator Instructions)

Mark Schoenebaum, Evercore ISI.

Thanks so much for taking the question. Ian, I hope you're well. Frank, I hope you're well.

Ian, on the topic of the split, I think at Tim's conference a month ago or so, you made some remarks that the Street interpreted as you backing away from a split and that's sort of the widely-held consensus view now. So I'd just like to hear you explain what did you actually mean to communicate at that particular broker conference? And then if I may, maybe for Dolsten, can we get an update on the oral PCSK9 and timelines for the injectable CVOT trials and whether there's any possibility you would file before they are out? Thank you.

Thank you, Mark.

First of all, I want to stress that no decision has been made and ultimately our decision will be based on what we believe is the best interest of the shareholders. And, going back to my prepared remarks, we are looking at these four criteria of are the businesses performing well, do we believe the business will continue to perform well, do we believe there's trapped value, and can we extract it on an after tax basis.

So I don't know what the Street perceived, or I signaled or didn't signal in that meeting. I indicated I do believe that the trapped value question has become more complicated with both the increase in our share value and the decrease in the P/E for the comparables. We continue to have very robust dialogue in the Company preparing for this decision, certainly stress testing with our two management teams on issues of what initiatives inside their strategies could only be done if they were separate. And this is, I think, a key point to look at. Is there some material obstacle inside the Company for implementation of strategies of either of these divisions if they remain inside Pfizer or can all material strategies be efficiently implemented if we were part of Pfizer.

So no decision has been taken and we will make that call by the end of the year. And I look forward to giving a decision on that, but what I would like to stress is, that I don't think that optionality necessarily has an expiration date. Like any business we have in Pfizer, whether it's any part of our business, we continually look at our capital allocation. We continue to look at what's in the best interest of Pfizer, which businesses can prosper best in Pfizer. And so, what I would say on optionality is that we will have set up the infrastructure and to be able to look at this question at any point in the future if the decision was at the end of the year to remain as we are with both divisions inside Pfizer.

Should we go to oral PCSK9?

We don't think that the oral PCSK9 profile would be competitive with the strong LDL lowering seen with PCSK9 antibodies, observed in many phase 3 trials. In the CVMET area we actually have moved other interesting products forward and we have two NMEs coming into the exciting field of NASH. Albert, do you want to share a comment on the regulatory strategy for --

And the progress of our program with sterile injectable, yes. We recently confirmed that the first study has met the required endpoints, the remaining two ongoing Spire-2 lowering studies are anticipated to complete later in 2016. Patient enrollment in the SPIRE-2 cardiovascular outcome was completed in April 2016. And based on our current estimate, the primary completion of SPIRE-2 the study is expected to occur in the second half of 2017.

Thank you, Albert. Next question please, operator.

Gregg Gilbert, Deutsche Bank.

Thank you.

Ian would you say it's fair to say that maximizing your tax structure and access to balance sheet, things you care deeply about, are things that cannot be addressed anytime soon without a separation of some kind? And then, second question if I could ask for your latest intentions on launching Inflectra and are there any key legal milestones that we should be aware of here in the coming months? Thanks.

Okay. A separation doesn't under current tax laws facilitate a speedy ability to change the domicile for either of the companies. Under the separation rules now, both companies would be held to the standard of the combined company for three years post the separation. So under present tax laws, I don't see a separation as being a quick route to improving the tax situation.

However, I am and remain optimistic that this tax issue will be dealt with by Washington, hopefully in the near future. And I think there is a general consensus that we do need to have tax reform to enable US multinationals to be competitive. On the launch of infliximab, I'll ask John to answer that.

Okay thanks for the question, Gregg.

In terms of just one initial comment commercially, I would just reconfirm that we are moving ahead with launch preparations and launch timing will be impacted by the upcoming court decision. I'll ask Doug Lankler, our General Counsel, to make a couple of comments there.

Just to review the dates, so Inflectra was approved on April 5 and we gave our notice to Janssen immediately. That notice period expires on October 2, and we've agreed not to launch before October 3. Earlier this year we filed a motion for summary judgment that Janssen's 471 antibody patent is invalid. Starting on August 16 the Federal Court in Massachusetts will hear arguments on this motion and some other issues. If the court rules in our favor, there will be no legal restriction on our ability to launch. If the court doesn't rule in our favor we still have the trial and we'll review our options at that time.

To confirm, if the court were to rule in our favor we expect that we would launch Inflectra sometime after October 2 which is after the expiry of the 180-day notice period.

If they don't rule in our favor, we would need to look at it the different scenarios of when we launch, what's the valid launching on our own, what's the risk we are taking, taking that launch risk, what is the loss of value if other competitors come in with us, and we will make that decision once we know the results of the court case.

Thank you.

Frank would like to add something.

Real quick to punctuate what Ian said relative to the tax rate, it's the third set of proposed regs that Treasury issued in April where basically the split companies, if you were to split, each of the split companies would be valued at the pre-split Pfizer valuation for a three-year period. That is just a little bit more sub-ledger detail.

Thank you.

Next question please, operator.

Chris Schott, JPMorgan.

Great, thanks very much. Just two questions here.

First a question for John on essential medicines, roughly a year post Hospira. Can you just elaborate a little bit on the key growth drivers for your franchise going forward and how you think about a longer-term sustainable growth rate for this business as we move past the remaining LOEs?

The second question coming back to the question of split. I think we've seen past pharma spin offs do very well and uncover additional strategies to drive shareholder value that may not have been considered when they were part of a larger organization, I guess you look at Zoetis for example, I think that's surprised the Street on how much margin leverage they have had. Is that a relevant thing to think about with these much larger businesses you're considering to be splitting here, and how does that factor into a decision to split the Company?

Thanks so much.

Okay, thank you. I will ask John to do the post Hospira, then I will talk about the split, and also Frank to add some comments, too.

Thanks for the question, Chris.

So first of all, let me just say that we are actually very pleased with the performance in the second quarter and so far this year across all of the segments of our business, both Legacy, portfolio, the peri-LOEs brands, which are performing above market benchmarks, the emerging market business and then the growth drivers, biosimilars and our sterile injectable portfolio. So biosimilars clearly is a very attractive market opportunity.

Pfizer is the leader in total sales with biosimilars commercialized across all three classes. So we are aiming with our development pipeline to really add to our leadership position in the market. Sterile injectables is another attractive segment and clearly that was a primary driver of our acquisition of Hospira. We are the leader in that segment, as well. We continue to be very positive about the opportunities for continued growth in the sterile injectable business.

And then the performance of our core brands in emerging markets continues to be strong. Our business performed well again in the second quarter, primarily driven by some of the incorporation of Hospira operations, but actually even excluding the impact of Hospira, we saw strong performance in the second quarter, as well.

In addition to those core franchises, we also see the anti-infectives portfolio in women's health continuing to be strong therapeutic areas for us where we have a leadership position. So when we put all of those drivers together, even in the face of the impact of LOEs that we are managing on behalf of the Corporation, our aspiration in the medium term is to take the Essential Health business to a growth rate in the low to mid single digit range, and as a consequence we believe we can add significant shareholder value through delivering that performance on a sustainable basis.

Thank you, John. I would add that part of the investment case with Hospira was the launch of some of their portfolio in the international markets. This does not occur immediately. It depends on the state of their different registrations, and frankly we expect that to occur over a two-year period post the integration. So some of that growth internationally will come once registrations are complete. And we continue to look at the total portfolio of the Essential Health business and look for ways of restructuring that. So that is part of the strategy of the team.

With regard to the split, it's a good question when you look at some of the splits in the pharma area and what was perceived as increase in value. Part of that is, I think due to the fact that if you look at perhaps the, you said, the -- our own animal health split or Abbott or Baxter or the others, you have to question, number one, were the separate parts all being invested in equally? I don't think they were. Were they getting the same amount of management attention? I don't think they were.

In our particular case we are investing in both segments heavily and there's a big difference between a division that you're spending being 8% of your revenue and its management attention compared to a division that has 45% of your total revenues. So I think those are things we are looking at, but I do acknowledge that there is this general assumption out there that split companies will improve their performance because of more management focus, which we are trying to deal with by having very distinct leaderships. And also we've looked at some of that research. Perhaps Frank would like to comment on that.

Sure. So we look at the S&P 500 index and we compared it to the Guggenheim split company index. And it's interesting. If you look for one year the S&P outperforms the split company index. Five years it's about a push, roughly a push; 10 years the split company index outperforms the S&P 500, but on a compounded growth rate basis 1% and change. So there's no real material difference, at least if you look at the returns on a 1-, 5-, or 10-year period, the S&P versus the index.

So the key question in the [list of long tied off] questions is, what can be done differently if the companies are -- if the divisions were split versus what can be done if they are inside Pfizer. Which brings in, of course, balance sheet, brings in the whole capital structures and also appetite for risk.

Thank you.

Thank you. Next question please.

Vamil Divan, Credit Suisse.

Thank so much for taking my questions. Good morning, everyone.

So my first one would be for Albert and just around Prevnar, you did, obviously, give the guidance for this year and how to think about the impact of the catch up dosing last year. Can you just talk a little bit more longer-term? How do you see this franchise as you think about 2017-2018, both the US and ex-US. And then also, maybe you could just remind us on, it's been a couple years now since the ACIP recommendation for the adult -- use in adults, what's the timing and the process for them to reassess that? I think it was five years after that initial vote. Can you just remind us?

And then my second one, I think, is for John just on the EH business. You talked about the top line. Maybe a little bit more -- surprised by the margins that we saw this quarter. They were quite a bit below last quarter. Is there something specific to this quarter, or how should we think about the operating margin progression for this business going forward?

Thanks.

Okay. Albert will answer the questions you asked and I think on the margins Frank had some interesting analysis that he'll comment on.

Speaking of the remaining of this year, overall we expect total revenue of the franchise to be comparable to slightly down compared to 2015, as Ian said. Moving forward, in the US we're focused on capturing the remaining cohort and expanding usage to a greater age range, given the expanded label. However, to realize the full potential of this, we need the ACIP recommendation.

We also continue developing fully in the other markets. As we always do, we will incorporate our expectations into our 2017 guidance that we will provide in January.

But just to make some comments, Prevnar will continue to be a significant program. Generally speaking, in the US we will continue to see a decline as we exhaust the catchup opportunity and then we will stabilize. In the international markets, we will continue growing as we gain more reimbursement and recommendations. And of course we're working to develop the next-generation pneumococcal conjugate vaccine with additional serotypes.

Thank you Albert.

On the Essential Health business in the margins, from a gross margin perspective, it's really a combination of the impact of Hospira, which has lower gross margins relative to the overall business, and then the impact of product LOEs. Those are the two things really driving the gross margin impact.

If you go down operating margin, then once again, it's really a combination of the incremental Hospira SI&A spend and the incremental Hospira R&D spend, which weren't in the prior year numbers. Those two on expenses give or take about $170 million combined. If you drop all that, that's also what's impacting the operating margin.

We're not seeing anything that is outside of our expectations, other than this -- in this timing in the second quarter of the exchange whammy, which is in the cost of goods due to phasing and in the revenue full year forecast take that into account.

We gave guidance for the year. We reaffirmed our cost of sales guidance 21% to 22%, which takes all of that, all of it -- Essential Health, all the FX, we take all that into account.

Thank you, Ian and Frank. Next question, please.

Tim Anderson, Bernstein.

Thank you. A couple of questions.

Ian, when you and I spoke about a split up in early June, one of the metrics you said you were considering was how cash flows would be impacted as a split company versus a combined company. And you brought that up a couple of times, almost seeming to signal that there was a cash flow problem of some sort if you were to split. I'm wondering if you could just elaborate on what potential problems might be from a cash flow perspective and balance sheet perspective.

And second question, also in early June when we talked about M&A, you mentioned all options were on the table when talking about deal sizes and I'm wondering how much weight to give language like that. Does it really mean it's reasonably possible that we could see Pfizer spend, let's say $100 billion on an acquisition target? And maybe this is a dumb question, but with your IO platform you're building, are you willing to rule out some of the obvious big IO take out targets like a Bristol or an Astra that would obviously be duplicative in certain ways?

Okay, I don't think there's -- what I indicated to you was that we are looking at the capital structures of the two businesses, and how you deploy the cash flows, and clearly if you are in two distinct divisions, you don't have the same opportunities of deployment of cash if you are in two companies as you do if you are one. You have less choices as to which areas you put it.

When you are one company you can take those cash flows, return them to shareholders, continue investing in your business, pay your dividend, or do business development in the Essential business. Once you split, you've permanently divided those cash flows and of course you lose flexibility. I think that was basically my comment there, which is understandable.

Your question on M&A is, we constantly survey the M&A space. We have the ability to do acquisitions. I don't think we're necessarily limited in size. If the transaction is attractive and creates shareholder value, we have the wherewithal to do the transactions we need to do. And I wouldn't speculate and never have speculated on specific targets or specific opportunities. Thank you.

Thanks, Ian. Next question please, operator.

Steve Scala, Cowen.

Thank you. I have two questions.

The first is a more near-term question on Prevnar. I believe the last update on the US adult penetration was that about one-third of the market had been penetrated and today it was stated to be 40%. So it appears that there has been some additional penetration, but sales are still down versus Q1 and down versus Q4. So the question is why are sales declining when penetration still appears to be on the uptick?

And the second question is for Dr. Dolsten. Pfizer had some provocative early data on a differentiated gamma secretase inhibitor for Alzheimer's disease at the recent AAIC meeting. Is Pfizer moving ahead with this agent despite multiple failures from other companies in gamma secretase?

Thank you.

Thank you, Steve.

Could you explain the dynamics of the adult market?

Steve, the reason why this is happening is because this is a one-time event in the lifetime of the individual adult. So individuals that are vaccinated, they don't have an opportunity to repeat the vaccination in the next year and that counts against you when we move into the next year.

So the increased penetration just indicates you have now got less of a pool to get 100% of the pool vaccinated. We now think 40% have been vaccinated, whereas the remaining 60%, those 60% are harder to get at because most of them have not been vaccinated by Pneumovax, and so they are more difficult targets to access.

Those that were vaccinated last year, they don't repeat the vaccination this year, so the growth is declining.

Declining. Okay, Mikael. Gamma secretase.

Thank you for the interest and great that you picked up some of the things we have communicated. We have built a quite nice portfolio in the Alzheimer's space with the gamma secretase modulator and a very selective BACE1 inhibitor. Our gamma secretase modulator was based on extensive work to develop a unique profile in the sense that it modulates rather than inhibits the cleavage of the gamma secretase function, of the A-Beta. So you get the unique profile where you do lower some of the forms of amyloid, the longer forms typically the 1 to 40 amyloid beta that has been assumed to be the most toxic, while it actually preserves and possibly enhance some of the shorter forms that potentially even can be beneficial.

So we do think we have a unique profile and it does not have the type of, so far, side effects that have been reported with gamma secretase inhibitor including GI issues. This has been a very tolerable [clean ride], so we will certainly continue to look at ways to advance this molecule as a standalone molecule, and we have the unique opportunity to consider combining it with BACE1. So it's a field we feel very enthusiastic about the recent advances, and thank you again for having noticed it.

Thank you, Mikael. Next question, please, operator.

Jami Rubin, Goldman Sachs.

Thank you.

Ian, not to belabor this topic, but forgive me, I am just -- for a couple more questions. If the decision is not to split later this year, should shareholders infer that you believe that Pfizer shares are fully valued? Because you've spent a lot of time talking about what part of the decision is to decide whether or not there is trapped value. So if we decide not, I would assume that would mean you feel there is no trapped value.

My second question is, I think investors are also just frustrated that it is taking so long to decide. Is this all about tax considerations? Because it seems when you initially floated the idea and created three separate companies, which is now two separate companies, you pursued both AstraZeneca and then Allergan. So I'm just wondering how important having a competitive tax basis is to making your decision a tax inversion.

And third, you brought this up in your comments, but just curious, your level of optimism that a new administration will pass broad tax reform. And should that happen, does it make sense for you to wait on deciding on the major transaction or deciding on a split?

Thanks very much.

Thank you.

Well, I would leave the market to decide if Pfizer shares are fully valued or not. I personally think that we have a lot of very positive energy in our pipeline and our stock and whether it is fully valued or not, doesn't mean there is or is not trapped value in one segment of it. So I think they are different questions. The answer would be, I am not sure whether there's trapped value, but I am pretty sure that we have a very robust pipeline and will produce greater value for shareholders as we go forward. And so I think that's the way to answer that.

Now on the tax reform, I am cautiously optimistic as there is more discussion on both sides of the aisle on the need to reform the tax system and the need to invest in the United States. And so, hopefully with a new administration, whoever the administration is in, they will relook at the need and there will be energy around the tax reform. And of course, the potential of that tax reform has implications for what type of transactions you want to do and what type of premiums you want to pay. So it is an influence in our thinking.

Thanks, Ian. Next question, please.

Richard Purkiss, Piper Jaffray.

Thanks. I've got two questions.

Firstly, can you give us an estimate of Ibrance penetration, broken down if possible by line of therapy in the US? And then, on Sutent, I've been modeling pressure going forward as IO therapies into earlier lines of setting. But is there an opportunity to protect value by moving it into the adjuvant space? Thanks.

Thank you, Richard. Albert?

Thank you very much, Richard.

Let me start by saying we are very pleased with the performance of Ibrance. As Ian said, since launch it has prescribed by more than 7,600 physicians and received by approximately 35,000 metastatic breast cancer patients. On your question on the penetration in the different lines, the most recent market share reports I have seen show that we have reached the first-line market share of 43% and the second and third-line market share of 46% and 24% respectively.

And also we continue to see very strong insurance. Feedback from prescribers and patients continue to be very positive, particularly around patient quality of life. And moving forward, we will continue building momentum in the US as we expand on the penetration in all lines of therapy.

We will continue to expand geographically. As you know we have five in EU and could have an approved product by the end of the year. And we will continue to expand into earlier lines of therapy. As you know we have pivotal studies ongoing in this population.

Now let me move to Sutent. You are right, we did report the S-TRAC results. Let me say a few words about it. Today there are not treatments approved or widely used in the adjuvant setting for RCC. Nephrectomy is the standard of care. The S-TRAC study that we did aimed to determine if adjuvant therapy with Sutent post nephrectomy would be beneficial for RCC patients with nonmetastatic disease and we did that in high risk of patient recurrence. The results were not only statistically significant, but also clinically meaningful. So if approved, Sutent would be the first product approved in the adjuvant setting for RCC.

Too early to comment on filing and approval timelines. We will update you on appropriate times, but how to think about the opportunity is basically also part of your question. The eligible population for S-TRAC of when we did the trial was stage 3 patients. And the small part of non-metastatic phase 4. The stage 3 population in the US is 5,000-6,000 per year approximately. Assuming that 80% of patients that are stage 3 are receiving nephrectomy, this will result in approximately 4,000 to 5,000 patients eligible for Sutent in the US per year, with similar numbers expected in Europe. Of course these are preliminary numbers, and in case of potential approval also will depend on the label.

Thank you, Albert. Next question, please.

Geoff Meacham, Barclays.

Morning. Thanks for taking the question.

I have a few on Xeljanz. When you look, growth has picked up of late and you do have ulcerative colitis and PSA as new drivers. But on the other side you have JAKs hitting the market soon and competitively and uncertainty on psoriasis. So I think my question here is where does this fit among Pfizer's priorities for commercial stage products and then do you have to press reset in the positioning here when you look at the marketplace, especially with baricitinib coming? Thanks.

Yes, Albert, do want to take this question, please?

Yes, absolutely. We are very bullish on the opportunity of Xeljanz. The growth was significant, 72%. And we continue to look to expand Xeljanz geographically. As you are aware, in March the EMA accepted our application for the treatment of RA. Discussions are going well, and also we are looking forward to indications in psoriatic arthritis and ulcerative colitis. Both of them are sizable markets, exceeding each one of them only the [7.3 billion] each one of them of market opportunity.

Your question about competition, first of all, it's difficult to make direct comparisons without head-to-head trials. Results from the initial Phase 2 studies of competitors of baricitinib, for example, appear to be consistent with JAK class. But we believe that this data continues to support the value of JAK inhibitors for the treatment of RA and as a result will grow the class. For our product we are confident on the value of Xeljanz because we have a first-in-class JAK inhibitor and the ongoing data dissemination of extensive real world experience continues and will provide significant growth.

Thank you, Albert. Next question, please.

Marc Goodman, UBS.

Good morning. A few things.

First, can you give us a little more color on China and the growth there and what are the key products and what's happening?

Second, Lyrica both first quarter and second quarter there's been a significant jump in revenues and yet you look at the prescription trends and they haven't changed much. So it is clearly pricing, and I'm just curious if there's more of the pricing that's reaching the ASP [and gross adds] are changing there in a good way for you?

And then third, can you just let us know for the rest of the year what kind of data readouts will we see for your Immuno-Oncology assets? Thanks.

Okay, so thanks for the question, Mark.

So China continues to perform well. Even in the face of some anticipated cost pressures, we continue to see some strong volume growth. Overall, our business grew around about 11% in the quarter. Hospira is a very small driver of that growth and to Ian's earlier comments, in China, whilst we see significant potential from the Hospira portfolio it will take time to realize that, just driven by the time of regulatory approval.

Overall, the franchises that are growing strongly in China include our cardiovascular business, which is really very well aligned to the increasing priorities of the Chinese government, our anti-infective portfolio continues to perform well. Overall we are really very positive about the opportunities for our business in China. It's very well aligned with the priorities of the Chinese government and we are working very closely with them to strengthen primary care services and management for chronic diseases, which we believe will do good things for the Chinese healthcare system and for patients and obviously are very well aligned with our portfolio, as well.

Thank you, John. Albert, Lyrica.

Lyrica is doing very well. In the US it was significant growth, but also outside the US which had the growth of this quarter. And it's a mixture of both volume, volume is growing and pricing and internationally it's mainly volume.

I think the pricing in the US reflects the value of the product to the patients and to the healthcare system. Data on oncology?

I'll say a few words on data readout and oncology overall. We have readouts for non-small lung cancer for EGFR-mutant patients with dacomitinib. We have a readout that's a Phase 3 study, we have readout also for Bosulif in first-line CML, again a Phase 3 study. And in the early pipeline we'll continue to update you as the data evolves on our IO portfolio whether 4-1BB with Keytruda, which was shared at ASCO, 4-1BB now with avelumab, OX-40 with avelumab likely to come at select conferences late this year and early next year.

I should also mention that in our portfolio of targeted cancer drugs, we will share at the later part of this year encouraging data with several compounds, glasdegib, also known earlier as SMO AML; PTK7, ADC ovarian cancer; lorlatinib for ALK-positive lung cancer; and our 7775 EGFR-mutant drug for resistant lung cancer will also be shared. So it's quite a nice rich data flow in both IO and targeted cancer drugs over the period to come.

Next question, please.

Alex Arfaei, BMO Capital Markets.

Good morning, folks, and thank you for taking the questions.

Ian, obviously 4% operational revenue growth for a company of your size is good. But as you step back and look at your innovative segment, it is quite concentrated on Prevnar, the trajectory of which is uncertain, as illustrated this quarter. And it's also quite dependent on Ibrance and Xeljanz for growth, both of which have significant competition coming. And finally you have got these patent expirations between 2020 and 2023. So how do you think about the growth prospects of the innovative segment, since that's clearly where you get most of your valuation? And could you comment on the need for business development there?

And a couple quick follow-ups, if I may. Sorry if I missed this, but what was Prevnar Adult sales by region if possible? And how should we think about Chantix as new growth trajectory? Thank you.

Thank you, Alex.

On the innovative business, I think it's in a very strong position right now. If you look at the underlying growth with Ibrance and Xeljanz and Chantix and Lyrica, clearly the business is functioning both well internationally and in the US. So I think there are strong short-term drivers.

I do understand that as we've signaled to you that Prevnar is likely not to be a growth contributor in the 2017 period, in the 2017-2018, but on the other hand, we will see a reduction in adult sales in the US. We will begin to see a pickup in adult sales internationally and we'll look to explore adult sales in the audience from 18 to 55 in the US, as well.

So I think you'll see very strong growth drivers in most of our major products in the innovative area with slower growth or flattish, probably in Prevnar. And then I think you look to, while we do have LOEs later on in the decade, we then been begin to see the result of all of our investment innovation. You begin to see the launch of tanezumab, or you see the launch of PCSK9, or the launch of ertugliflozin, which we believe is a best-in-class molecule, and coming into a revitalized positioning in the marketplace. We see our vaccine products coming forward with c. dificile, or perhaps later staph aureus.

So I think you see our old portfolio coming through very strongly and there I too believe that while [tobistate] is the PD-1, what is really going to differentiate the Company is the ability to play in spaces from what we would call cold tumors, which don't react to the PDL-1s and you then need to get in there a very specific sort of vaccines where we're very strong or where you need to go beyond the PDL-1 and you need to add triplets and doublets.

We have nine products in Immuno-Oncology, so I think we're going to be positioned as a company that can give you the backbone of a PDL-1 and in the same package can give you doublets and triplets and traditional therapy. And I believe this is the key to really unlocking the value of Immuno-Oncology, is this offering of capturing patients rather than capturing individual treatment arms. So I am excited about both our near-term and long-term opportunities. Thank you.

The Prevnar Adult revenue by region question and Chantix maybe I can take. The adult revenues this quarter were $320 million. By region that was $276 million in the US, but as we said declined 37%. And 45 internationally that increased 41% and that trend will continue (inaudible) to increase.

On Chantix, Chantix revenues were up 24% operationally and that was driven by the US. This increase reflects the robust efficacy of Chantix compared to other (technical difficulty) and the evolving safety profile based upon the EAGLES and real-world data. EAGLES data is very important, so let me give you some insight on that.

The trial was the largest clinical trial of smoking cessation medicine. It was conducted at the request of the FDA and the EMA. The trial concluded that -- the trial did not show a significant increase in the incidence of serious neuropsychiatric events, with Chantix or bupropion compared to placebo nicotine. And in terms of efficacy, results saw the patients taking Chantix had significantly higher continuous abstinence rates than patients taking bupropion.

In Europe, the Chantix label has already been updated to remove the black triangle and in the US, as you may be aware, the FDA has scheduled a joint advisory committee meeting that will review those data. Overall, we believe that the available clinical data does not support any increased risk of serious neuropsychiatric safety events in patients attempting to quit smoking with Chantix. And obviously, the black box warning is discouraging for physicians to prescribe the product and for patients to take this medicine.

So we are really looking forward to discussing in September with the advisory committee.

Thank you.

Thanks, Albert. We will move to the next question, please.

John Boris, SunTrust.

Thanks for taking the questions.

Just want to go back and revisit the taxation question, Ian. If we look at your current tax rate of 24%, our thoughts are that if you look at some of your losses of exclusivity and if you've done really good tax planning on a lot of your assets that lose exclusivity between now and 2020, we estimate that there is approximately about $12 billion that lose exclusivity during that time period. And when you couple that with Prevnar that is above your tax rate, at lease that's our assumption, isn't there an issue where there could be some creep upward on your overall effective tax rate? And just help us understand, I know you don't give a long-term projection, but again, with that thinking, it would seem that with those sales accounting for about one-third of your total sales, that that might influence the tax rate or bias it upwards.

Second question -- since you haven't taken off the table a large acquisition, can you remind us the qualities of the AZN acquisition that you attempted, and is that something that you might consider revisiting going forward?

And then the last question just has to do with Anacor on the crisaborole asset. You've given a long-term revenue target for that asset. Are you still comfortable with that target and by what year could you hit that target? Thanks.

John, first of all, I think we are very confident of the approval of our forecast we put out there. We think it is a unique product. Clearly you need a ramp up of -- normally you hit peak sales in about fifth year out. Maybe it's faster with this product, given the unmet medical need that I don't think we've given evidence on that, or given information out on that. Albert, do you have any update on that?

You said it very well. We do believe what we said. But we continue assessing the product. That would be a $2 billion plus opportunity. And it's driven by really the unmet medical need. To date patients suffering from this condition have limited treatment options because approved therapies have limitations related to safety, including black box warnings. And crisaborole already used systemically in other agents has the potential to have a very favorable safety profile, which is particularly important in pediatric population, which is a very big part of the overall atopic dermatitis population.

So we are confident of our (inaudible) projections and we expect earlier than the normal fifth year peak sales given the unmet medical need in the marketplace.

The attraction of AZ was threefold. It was around revenue and pipeline, especially the immuno-oncology assets which are now not as relevant to us given our deal with Merck. It was around operational expense savings, and it was around financial or ability to deploy our capital globally in a tax efficient manner.

You know, I really can't comment on any appetite around any specific company. So we remain interested in doing business development deals that would achieve similar results, i.e. getting pipeline that's got growth that fills in our pipeline, operational synergy savings, and potentially tax savings. Those still remain attractive to us.

So John, the way to think about this is, in 2009 our tax rate was 30%. We've given guidance this year with a tax rate of 24%. We've actually taken that tax rate down, give or take about 1% a year since 2009.

I think we've clearly established a really good rhythm, and by the way we did that during a period of very large LOEs, and obviously going forward we'll provide guidance on the 2017 tax rate on our third-quarterly earnings call when we close out 2016 and give guidance for 2017, but please know, obviously, we do lots of tax planning. We understand what's coming at us for the next three years and our objective is to continue to have that tax rate be as effective and efficient as possible.

Thank you.

Next question, please.

Manoj Garg, Healthco.

Great, thank you.

I have two commercial questions and one capital allocation question for Frank. On the commercial front for Xeljanz we notice that it came off of Express Script's exclused list for 2017. Can you comment on any other notable changes for 2017?

On Ibrance, are you proactively taking any measures there with contracting to ensure leadership position when additional competitors, if and when they do emerge? And then I will follow up with my question for Frank.

Okay, on the commercial situation, we continue to improve our access and our tiering on Xeljanz and on Ibrance. We think we're in a very strong position and we offer good value equation to patients in managed care, and we'll continue to monitor that as and when competition comes through. And your question on the Xeljanz -- no, on the capital allocation? Can you repeat the last question you had?

I think it was on Ibrance.

Let's go to the third question you had -- you wanted to pose to Frank.

I will come back. Sorry.

We will get him off-line. Next question, please.

David Risinger, Morgan Stanley.

Thanks very much.

I have one question for Frank and one for John. Frank, could you just talk about the standup costs preparing for separation that have been reflected in recent non-GAAP operating profit results? So more specifically, I don't know if you have the numbers, but possibly the first-half spending that was in your non-GAAP income statement in the first half of 2016?

And then for John, with respect to your internal Pfizer developed Remicade biosimilar program, could you please just update us on that and your plans for that going forward?

And actually, before I finish, going back to Frank, should we assume that whatever the standup costs or potential separation costs that are being run through the income statement this year will continue going forward, since Ian had mentioned that even if you decide not to split at the end of this year, you plan to retain that optionality. Thank you.

So on the optionality costs, Dave, those costs are all in GAAP results and they are not in adjusted results, so what you referred to as non-GAAP. Let me run the numbers. For this quarter it was about $60 million. Year to date it's about $110 million. Since inception of the projects, so that goes back a couple of years, $600 million. And one key point here is, the way we program the work and therefore the resulting spending is, approximately two-thirds of the spend would take place after we make a decision.

So we have programmed it to try to preserve as much capital as we can while giving ourselves the ability to implement optionality if we decided to do so within that 12-month period following a decision. And in terms of the sunk cost, that would obviously -- that work is completed and if we were to make a decision soon or sometime in the future, that work remains completed. We don't basically lose any of the work that we've completed to date.

And ongoing costs to maintain the reporting we have are de minimis. John.

Thanks, David, for the question on our internal infliximab program. Just as a reminder, we out-licensed that as part of our agreement with the EMA when we acquired Hospira to Novartis/Sandoz. We retained the commercial rights for a number of territories, including the US and certain other markets. That program is progressing on track. We expect to have the readout from our pivotal Phase 3 trials from that program towards the end of this year.

Thanks, John. Next question, please.

Seamus Fernandez, Leerink.

Thanks for the question.

Just a couple of quick ones. As we think about the Anacor acquisitions, you made an unusual move and seemingly a timely one, given the increase in valuations in the biotech market. Ian, can you comment on the valuations in the biotech space as you see them today? Do you see opportunities despite the increased valuation, or do you think that enthusiasm here is starting to build in too high expectations?

And as a follow up to that, can you comment a little bit on the strategy with crisaborole? Obviously it fits well with your pediatric sales force, but this is also an entry into the dermatology market, to some degree, where you certainly are present with Enbrel internationally, but don't really have a presence in the dermatology market in the US. Just wondering if there's a broader interest in the derm space, particularly medical derm, where when we hear from dermatologists there is a significant vacuum in innovation.

And the second question, biosimilars in general, we heard from Sandoz in June that pricing is coming in quite a bit below where they had modeled the market, but penetration is also coming in higher. Can you guys talk a little bit about, John maybe you can talk a little bit about how the biosimilar market is evolving and how the uptake of Inflectra might be different from competition that you might see to Enbrel or how you might compete for pharmacy-delivered injectable products. Thanks.

On valuations, I think that if you go back 6-7 months they were -- I think we said we thought they were frothy on biotech. They came down and are beginning to build back up again. It all depends on each individual company, what's the product, what's the opportunity, what are you willing to pay, what can you add to it.

I don't think you can generalize on valuations across different products. Thank you for the question. On the crisaborole?

First of all, you are absolutely right derm is a very important area. From immunology, we have rheumatology, dermatology, and GI and derm was what we were missing and now we're getting with crisaborole. We are building derm capabilities as we speak -- commercial capabilities. Anacor had already started building them and to continue very rapidly scaling them up. And we're going to use our own primary care footprint, because a big part of the crisaborole sales will be in primary care and of course our pediatric footprint.

Okay. Thanks for the question, Seamus.

As you say, we believe that there is likely to be some significant variability molecule-to-molecule and product-to-product, and indeed across markets based on a variety of factors, primarily including the number of entrants, the quality and breadth of the label, as well as the innovator reactions to biosimilar competition. That's pretty much what we are seeing in Europe. We've always said that we would expect price discounting to be somewhere in the 30% to 50% range. That pretty much is what we're seeing across Europe overall, with some variability across molecules. And we expect similar range in the US.

So overall, the market is very much behaving in line with our expectations and we've been very positive with the rate of adoption of Inflectra that we've seen in Europe and are certainly very positive about the potential opportunity that this represents in the United States, too.

Thank you, John. Operator, can we take our last question, please?

David Maris, Wells Fargo.

Good morning.

Two questions. First on the biosimilars in the new facility. When do you think that would be operational, and are there any trends that you are seeing in the marketplace that give you additional confidence in building this facility?

And the other is on the overall pricing environment. A couple of your peers have mentioned that the pricing environment in the US has more recently been difficult and they are assuming increased price pressure in the US, including increased rebating and discounting. Are you seeing that, and how do you look at that going the next year or so? Thank you.

I will do the pricing and then ask John to answer on the biosimilar in China. I think pricing has been competitive and difficult for many years now. Managed care is organized, the market is competitive, the product has to have value added to get access. I think Ibrance is an example of a product that has got access.

I don't perceive that in our therapies with the products we have that the pricing has become more difficult in the last year than previously. Is there political rhetoric that you would expect around the political season on pricing? Absolutely. Have there been some bad actors which have made it more difficult for the industry to get its message across? There have been.

But I still believe that this society and opinion leaders believe in an innovative industry and understand that a high-risk industry needs to have an ability to recuperate its capital and attracting capital, and so I think that overall we will continue in a competitive pricing environment, which is appropriate for society. So with that I will ask John to talk about biosimilars.

Thanks for the question, David.

So let me just make a comment, first of all, about the penetration of biologic medicines generally into China which, you know, is low vis-a-vis most benchmarks internationally. And so we believe that post the expiry of any relevant patents in China, a biosimilar is a significant opportunity.

Obviously, we are committed to bringing high-quality products to the market and so we are very excited with the investment that we announced in Hangzhou Economic Development Area to invest $350 million in what will be a state-of-the-art global biotechnology center. That center is expected to be completed in 2018 and we'll be working with the CFDA and relevant Chinese authorities to bring products biosimilar molecules coming out of that facility to the Chinese market as soon as possible following the completion of the plant.

Thanks, John, and thanks everybody for joining us today.

Ladies and gentlemen, this concludes Pfizer's second quarter 2016 earnings conference call. You may now disconnect.