AstraZeneca PLC
Q2 2007 Earnings Call Transcript

Published: 27 Jul 2007

[David Brennan:]

Thank you for joining us this afternoon. Welcome to our meeting, where our goal is to review with you our financial results for the first half of the year and discuss some very important aspects, some other things that are going on, changes that are taking place in our business. So I’ll start the meeting with an overview of results and where we stand, as well as the work that we’ve been doing to address our productivity challenge and the challenge that I laid down to our entire organization in February, when we reported the beginning of our restructuring program. I’ll then ask John Patterson to come up and provide you with an update to the changes in the pipeline as well as our R&D productivity initiatives since we last reviewed this comprehensively with you when we were together in February. And finally, here at his last AstraZeneca quarterly results meeting, John Symonds is here and he’ll take you through the financial data, as usual. At the end of that we’ll take questions both from you here with us in London, as well as folks that are online, and we’ll try to alternate back and forth and cover as much ground as we can. As you’ll have seen in the press release, the quarter’s results have an added layer of complexity as we begin to reflect the impact of the acquisition of MedImmune. As we step up our changes and the pace of our productivity initiatives and the restructuring charges that comes with it we’re going to do everything we can to help you understand that, to make it as transparent as possible. And by now, as I said, you’ve seen the second quarter results and the first half results, which we published a couple of hours ago. So let me just quickly go over it. Constant currency sales for the first half were up 8%. Earnings per share were up 15%, excluding restructuring costs and the impact of the MedImmune acquisition. I think these results are complemented by our strength in late-phase pipeline, which as you all know, we’re counting on to deliver the next wave of value to us in the medium term. The outlook for the industry remains quite challenging. Events such as the withdrawal of Vioxx a couple of years ago and more recently the criticism of Avandia I think illustrate all too clearly the heightened sensitivities within regulatory agencies and within society around product safety. And I think these sensitivities are often amplified as they’re played out in the media. The trust of patients is being eroded as a result of some of this, making it even more important for pharmaceutical companies to continue to further embrace high standards and responsible behavior in all aspects of our business. Before we get into further details of our financial performance, though, I’d like to talk about what we’re doing to drive performance across the AstraZeneca group, including our approach to responsible leadership. I’ve spent a considerable amount of time since last year getting the entire AstraZeneca organization aligned with the three strategic priorities that we presented to you when we were together in February. And we’ve added a fourth priority, which is the need to continue to change our culture and behavior in order to successfully drive our business as we prepare for what we see to be a more challenging future. Internally we refer to these priorities as the four pillars that underpin our aspiration and our core purpose, which is to make a meaningful difference to patient health through great medicine. In doing that we believe we will create value for shareholders and for society. The four strategic priorities are

[John Pattersons:]

Thank you, David, and good afternoon, or good morning, ladies and gentlemen, wherever you are. I’m really pleased to be able to share with you today the excellent progress that we’re making in developing the Astra Zeneca pipeline, and to give a degree of detail behind the headlines that you will have read in the press release, and already heard today from David. We’ve been working hard to increase the size of the pipeline with particular attention being paid to the later phases. Our quality-on-time initiative has now been running for one and a half years, and we’re seeing real evidence of an accelerated delivery with significant time reduction in the early phases of development and increasing numbers of products moving forward. We are building pipeline momentum as our portfolio increases to 157 projects, of which eight are now in phase three, representing seven new medicines. At the same time, we’re actively lowering the risk of our portfolio. The MedImmune acquisition has been a transformational event for the company’s research and development organization, growing our whole finds and capabilities base, and accelerating our biologic strategy. The Abgenics Cap and MedImmune externalization project gave us the capability to discover, develop, and manufacture monoclonal antibodies, vaccines and anti-virals, with the capacity to take eight biologics per annum into development. Together with the highly skilled and experienced MedImmune and Cap workforces, we’re now in a position that would have taken us many years and significant learning to achieve. We’re now more than capable of delivering our promise of 25% of new molecules offered for phase three development being biologics. In so doing, have created a larger, more diverse, and richer R&D pipeline. It covers organic chemistry, genetically engineered, and fermentation derived molecules, and anti-virals. When you add in the manufacturing capacity, we’re now a fully fledged bio-pharmaceutical company, capable of delivering the whole value chain on discovery to the patient. I’ve talked before about accelerating delivery of our pipeline and described the quality, speed, and cost of virtuous triangles. These are the activities that would lead to an improved R&D performance with an eight year time to market target. I’m sure you’ve heard many companies describe their ambitions in this area. I’m now in a position to give you many real examples of the progress that we’ve made. The shortening of our pre-clinical time scales has led us to achieve 14 first-time in line exposures already this year, which is more than the whole of 2006, which was, in itself, a record year. We’ve also used bar markers and personalized medicine to reach rapid go, no-go decisions in cancer in particular. Our next step is to create a culture of continuous improvement to both embed the gains that we’ve made and create further benefits. Already to date, we’ve succeeded in shortening our composite need in development times on first formal toxicology to planned approval by more than 18 months, while significantly increasing our throughput of candidate drugs. We will achieve, outperform our industry performance by 2010, as further speed and quality performance actions are introduced. This achievement is all the more significant, because we’re doing this while we’re increasing the throughput of projects and doubling the number of phase three molecules. Some real examples, both in discovery and development, including speeding up of lead optimization, reducing all one month toxicology studies by more than one-third, and finding ways of delivering first clinical exposure within days of regulatory and ethics committee approval. All of this whilst not compromising on safety, we’re moving in pre-clinical, faster in demand, and faster in to patients. We’ve put in place programs to optimize our phase two studies to make them fit the purpose, saving both time and cost in the process. These are just some examples of our quality and time initiatives, which expands the whole of R&D. In parallel, we’re looking to become a more lean, and agile organization. An exercise that started ahead of our MedImmune purchase, but which has now gained further momentum, as we seek the synergies across the new portfolio. We’ve already announced changes within R&D that will lead to the reduction of 700 full-time equivalents, their data of managing consolidation, (inaudible), and under our new regulatory leadership, providing focus and driving efficiency gains. Our disease area strategy has been implemented (inaudible) into Phase three will be made in the first half of 2008. You should be aware that as with all Phase Two, Three programs no data will become available if the Data Monitoring Committee supports the continuation of the program as all patients will then be included in a blinded fashion in the ongoing Phase Three study. The exception is our Horizon One, which is a study in second-line colorectal cancer, which will generate data, as it’s a straightforward Phase Two study. We’re aware of the recent events in cancer (inaudible) and have taken the appropriate steps in our program to mitigate against similar results. The glioblastoma results have led us to initiate a new (inaudible) in Phase Three program. Our three-armed Phase Three study glioblastoma is starting in the second half of this year and creating great excitement and interest in the oncology community. Saxagliptin, an oral DPP-4 inhibitor for Type Two diabetes, is the source of our existing Phase Three project. This joint development program with BMS is nearing completion and data was shared at the American Diabetic Association conference recently. They show that in combination with metformin, this potent agent significantly improves hemoglobin A1C fasting plasma glucose over a six-month dosing period. Saxagliptin is well tolerated and has not been associated with either weight gain or hypoglycemia. The NDA for both mono and combination therapy will be filed in the third part of 2008 in the United States and the following year in Europe. Now let me turn to the first of our new chemical entities that have entered Phase Three since I last spoke to you – 4054 is a specific Endothelin-A antagonist, which has undergone a significant, 300-patient placebo controlled Phase Two study in patients with hormone-resistant prostate cancer. The full study and the impressive overall survival benefit, which is now mature, will be presented in September at the ECHO meeting. Recoverability was good with the adverse events being those that might be predicted from its pharmacology. An extensive Phase Three program will start in September covering monotherapy and combination therapy in M-0 and M-1 patients. We believe that the profile of 4054, together with our understanding of this field, will lead to this agent being the first-in-class alternative to chemotherapy for hormone-resistant prostate cancer. Dapagliflozin a selective SGLT-2 inhibitor is the second of our two diabetes projects in collaboration with DMS. The Phase 2A program, was recently presented, and it confirmed the pharmacology in man would increase glucose secretion in the urine coupled with reduced platen glucose. The Phase 2B program completed earlier this year. We’ve agreed to initiate the Phase Three studies, having met all of our success criteria. The Phase Three program will also start this quarter and we strongly believe that Dapagliflozin can be both first and best in class. Our MedImmune acquisition brought with it a new monoclonal antibody for (inaudible), RSV. (inaudible) also known as Neumax is expected to file its DLA by the end of the year. The major neonatal efficacy study has already been presented and the package will be completed during the course of this Autumn. The increased potency over (inaudible) in preclinical profile lead us to believe that it could have a utility beyond RSV prevention. However, the first DLA will be for prevention of infection in at-risk babies. With three cancer drugs and new infection treatment and two potential primary-care diabetes agents now in Phase Three, alongside a best-in-class antiplatelet drug, we now have a broader, more balanced Phase Three portfolio with potential for first-in-class, best-in-class and primary care. However, the improvement story doesn’t finish there. Our Phase Two program is moving forward rapidly and the number of projects, which are in proof of concept during the course of the year. I’ll now highlight just some of them. B404 is a neuro-nicotinic receptor agonist, which we licensed for the symptomatic treatment of Alzheimer’s disease and cognitive deficit in schizophrenia. We’ve now confirmed the early promise of this agent and it has now entered definitive Phase Two study. In a one-month study on rheumatoid arthritis, 9056, an oral agent, has shown benefit on ACL-20 response rate. The data will be presented in November at the American College of Rheumatology meeting. It, too, presents a Phase 2B together with 5672, another oral anti-rheumatoid agent with a different mechanism of action, which will run in parallel, thus giving us two alternative mechanisms and (inaudible) profiles for symptom relief, disease modification in rheumatoid arthritis. Our small-molecule cancer program is also progressing well with 6244 in Phase Two for metastatic melanoma, search studies in nine other tumor types. Both 6244 and 2281 DNA repair inhibitor have been part of our externalization program. Both have biomarkers, which may help patient selection and both are now first-in-class opportunities. Two-two-eight-one is now in Phase Two (inaudible) patient-positive breast and ovarian cancer, having shown clear signals of efficacy in ovarian cancer in Phase One We now have a number of monoclonal antibodies in clinical development for asthma. Medi 528 is an aisle-9 antagonist, which is in Phase Two with positive Phase One challenge data, whilst CAT-354 and Medi 563 will enter Phase Two shortly. Most exciting is the early data on the Medi545, an antibodies interferon alpha, which has already shown activity in Phase One in systemic lupus. In the time available today, I’ve not been able to cover all of the exciting early developments, but obviously I’d be happy to answer your questions on any of the projects. Turning now to our marketing project, we continue to drive life-cycle development to maximize the products. The (inaudible) formulation is a good example. (Inaudible) for schizophrenia, as you’ve already heard, is imminent in the United States, whilst the EU launch is on track for the first quarter next year. We’ve submitted supplementary NDAs for bipolar maintenance and relapse prevention, whilst the XR bipolar depression EU package will be submitted in the first half of 2008 and the U.S. submission will go in during the fourth quarter of this year. We’ve previously told you that we have an extensive program of studies in major (inaudible) disorder and anxiety. I’m pleased to be able to tell you that the first pivotal depression study has now completed with positive data and that indications, as well, that Seroquel XR is also an active molecule in anxiety. We’re on track for a U.S. submission in depression in the third part of 2008. One of the key questions that the scientific and medical communities have asked is whether the properties that Seroquel is displaying across a spectrum of psychiatric diseases is unique to Seroquel or common to atypical antipsychotics. This table shows you that one of the things about atypicals is that each of them is just that, i.e., atypical and different and that there are significant differences in the binding (inaudible) characteristics, serotonin, norepinephrine and dopamine. These differences, exemplified by imaging techniques have recently allowed us to understand why Seroquel works across the range of indications and can be differentiated from typical and atypical antipsychotics as well as antidepressants. We’ve also made progress with other key life-cycle management opportunities. Presto life-cycle studies continue to roll out. We now have EU agreement to include the METEOR wording in the Crestor label and the FDA action date for the (inaudible) indication is later this year. Our outcome studies are maturing, we’re expecting to receive data on or before the previously indicated timetable. We continue to explore the potential for combination products with fibrate and cholesterol-absorption inhibitors, including our own AJD4121, which is now in clinical development. SYMBICORT, we submitted the JNDA for asthma and an SNDA for a dose counter. (Inaudible), the interest study is now completed and met its primary objective, demonstrating equivalent survival for (inaudible) and Docetaxel in pre-treated non-small lung cancer patients. And finally FluMist with a new, better formulation had a positive FDA Advisory Board expanded label and we’re now working with manufacturing to respond to the FDA warning letter in time for the next flu season. Turning specifically to MedImmune, the MedImmune purchase was completed on the 18th of June and we’ve already agreed on our R&D operating model and had our first high-level view of the total Astra Zeneca MedImmune (inaudible) derived biologics pipeline. The programs and technologies are highly complementary. We’re now entering into a phase of detailed analysis of this really very exciting, industry-leading portfolio. We’ll complete this review over the course of the autumn and are pleased to invite you to a biologic R&D Review Day, which will be held on the 6th of December near Washington, D.C., where you’ll be able to share with us the whole portfolio in greater depth and detail than we have today. To make Astra Zeneca fit for the future and to renew our business, we’ve shown you today how R&D is accelerating project delivery, delivering more projects and increasing our momentum in every part of the process. We now have eight Phase Three projects with a balance across first and best-in-class, acute therapy and primary care. We’ve transformed our (inaudible) space with a cap on MedImmune purchases. Nevertheless, we will continue to enrich our plans and our portfolio from both inside and outside the company. Astra Zeneca’s pipeline is moving faster, it’s larger, more diverse and low-risk than ever before. It will be delivered by a leaner and more agile R&D organization, which is delivery focused and cost efficient. As always, we’ll be data driven, critical and challenging of our project, but I am confident that the progress that we’ve made will now lead to a significant enhancement to the Astra Zeneca product portfolio over the coming year. Thank you for your attention and I’d now like to hand over to Jon Symonds to give you in depth on the financial numbers.

[Jonathan Symonds:]

Good afternoon, everyone. We’ve still got a lot of ground to cover, so let’s get straight into the agenda here. Here’s what I’m going to cover, firstly, the headline results and how all the moving pieces fit together; a review of where we are with MedImmune, performance, synergy, acquisition accounting, while we also want to move to core EPS going forward; researching program, cost and benefit; how the underlying business is doing and our expectations for the remainder of the year. Finally, our current thoughts in relation to capital structure. So here are the moving pieces in earnings-per-share in the second quarter

[David Brennan:]

Great. Thank you, John, and thank you, Jon, for reviewing the R&D situation. What we will do now is move on to Q&A. I’ll just remind the audience here live that we also have people who are online. We will start here live with the first question and then we will move on. Andrew? Question-and-Answer Session

[Andrew Bamm:]

Thanks. It’s Andrew Bamm at Morgan Stanley. I have four questions; two for John and two for Jon. For John Patterson, Saxagliptin, perhaps you could indicate whether you’ve met with the FDA and whether they have confirmed that they will accept your filing at the first half of 2008 given the issues associated with (inaudible)? Second, on your (inaudible) receptor antagonist, perhaps you could outline why you’re more confident given recent experience with (inaudible), the Abbott compound? For Jon Symonds, post-2008, after you’ve made the Merck payment and also the associated costs of restructuring, should we assume that that $1 billion is going to be subject to outward revision and what kinds of levels do you think we should be using in our models? Second, and you kind of indicated some of this, what percentage of the $900 million of restructuring benefits is actually going to be (inaudible) by R&D investments? How much is going to come through?

[David Brennan:]

John Patterson, do you want to start off?

[John Pattersons:]

Thanks, Andrew. First of all, we believe we have a complete and robust Phase three program for Saxagliptin that’s capable of being filed next year. The FDA has not asked us to do any specific extra studies, and in particular, any renal studies. We have in that package and will have on the (inaudible) dossier on renal insufficiency and the drug has been well studied at multiples of up to 40 times the alpha dose in Phase three. However, we’re not blind to what’s going on in the outside world. We’ve actually initiated contact with the FDA in relation to (inaudible) in general and the issues with (inaudible). We’re consulting with them. That is ongoing. As of when we get to the end of that consultation process, if there’s anything to say, we’ll say it. On 4054, I’m very confident that we’re going to get the right results in phase three for a couple of good reasons. One is we think we’ve learned from some of the designs from the other study in terms of how you actually treat subsequent treatments with the drugs in phase three, and in particular to concentrate on overall survival in the patient population, where clear progression-free survival is very hard to measure. The second thing is, there’s a significant oncological difference between them in that by being an endothelin A antagonist without the B, we believe that the B in our pre-clinical pharmacology is actually a negative finding and actually mitigates against the activities of drugs. Having selectivity for endothelin A we believe gives a significant difference between the drugs.

[David Brennan:]

Good. Jon?

[Jon Symonds:]

Yes, thank you. I hope over the last three or more years that we’ve demonstrated a set of financial policies that are very heavily focused on shareholder return. Indeed, the share buyback program that we’ve adopted over that period has been very much with that in mind. I think it’s absolutely clear now that there is a new stakeholder on the horizon and the board is clear that until we reach the desired level of long-term debt, that stakeholder is going to stand pretty firmly amongst our priorities. Until we get to the core level of debt, I think the board is going to want to make the assessment of buybacks in any one year to be dependent upon that level as well as the business opportunities that the company sees. I think we haven’t given up the (inaudible) philosophy of shareholder return. I think if at that point we still see strong cash flows, then I think share buybacks will come back more firmly on the agenda. I think in terms of the benefits of the synergy program or the restructuring program, I think it’s a bit too early to say, Andrew. I think what firmly lies behind this program, as David has described, is a belief that the business has to be significantly more competitive, focused, and efficient, and we’re driving these out now. It is also very clear that success in this industry is highly dependant on product flow. We have prioritized R&D spending for the last year or two and no doubt will continue to do so. I think we really would want to see how the business shapes before deciding it’s all going to drop through or it’s all going to be reinvested or a mix in between. I think that there is certainly a bias towards investment in products in the future.

[David Brennan:]

Good. Why don’t we go to the screen here, number one, Chris Schott from Bank of America.

[Chris Schott:]

Great. Just two quick questions for you. First of all, regarding your Medicare Part D, as we start looking out to 2008 and you’re having initial discussions with payers, is your impressions formularies, just broadly speaking, going to be as inclusive as we see currently or are we going to start seeing some of these plans start to be more selective with the products they cover at tier two? Secondly, just a quick question regarding the guidance for the rest of this year. That $0.30 dilution associated with MedImmune this year, then maybe taking away the one-time charges that made amortization. Thank you.

[David Brennan:]

Okay, the Medicare Part D question is a good one. Tony Zook is here. Tony runs the North American business, including the U.S. The contracting process has been underway for a while. I think we’ve had in the U.S. a pretty good view of what the opportunities for 2008 will be. The first round of contracting two years ago, really two-year contracts and then we went back into negotiation. And, Tony, maybe you can comment on where you think it’s headed from a formulary perspective and a tier two perspective?

[Tony Zook:]

Sure, David. Chris, I think the short answer to your question is the great majority of 2008 contracts have already been established and the formularies are pretty much locked and loaded and we haven’t seen any real significant shift whatsoever in formularies restricting access in any way shape or form. Our tier two access is very much in line with where we were through 2007. There is, obviously, a strong push in tier one to go generic first, but the tier two access rates really have not changed, David.

[David Brennan:]

Thanks, and Jon, on the guidance question, the $0.30?

[Jonathan Symonds:]

Yes, there’s a little bit of unraveling that’s necessary. I think you can work out very clearly what we think the amortization is and the interest. That will yield a profit contribution from MedImmune in the seven months that we own it. One thing I would just point out that part of the acquisition accounting fully values the inventory that MedImmune has on hand so that when that gets unwound, you virtually make no profit on the unwinding of its existing inventory. So without that, you know, it does contribute to the bottom line. So that’s pre-amortization and, obviously, doesn’t fully overcome the interest charge at this stage.

[David Brennan:]

Okay, good. Let’s go back to the floor here and then we’ll take an e-mail question that’s come in and I’ll give that one to John in a moment. Right here, Alex?

[Unidentified Analyst:]

(Inaudible) from Bear Stearns. I’ve also got four questions. To Andrew’s last question about how much of those $900 million they’ll be able potentially to drop through, just trying it in a different way, about a year ago when you gave us your map for 2010 you roughly provided enough for the operating margin to stay in the lower 30s; then we had the first restructuring program announced in February, which cost $500 million and you gave an indication then that probably wouldn’t boost the margin, that’s just to safeguard and protect the gross margin. Now we have an additional $900 million and, obviously, I do realize that I haven’t included MedImmune in all of this, but if you keep MedImmune out of the picture what has changed compared to a year ago why you think it’s going to be more geared towards investments without actually the margin improvement? That’s question number one. And then just a clarification question on the MedImmune synergies, you speak to Biologic’s investment not required, that’s $205 million in savings. I’m a bit confused; what is investment and what is cost? Is that ongoing cost of an investment? Just if you give some clarification on that. Then, you mentioned that you’re going to play the press between volume and pricing for Nexium and, obviously, I think that means you’re going to make further concession in the price. Do you have something very concrete in the back of your mind as you watch the prescription going forward, should we assume they already come at lower prices? And the final question is an update or a bit more clarification on the update you gave on FluMist in the press release where you said you expect we still deliver the lower end of the MedImmune guidance as in delivering about 75% more than last year. Can you actually tell us what exactly constitutes the bottleneck to determine the 75% rather than 100%? Is it because you have to do lot by lot check because of the current quality control issues?

[David Brennan:]

Okay, good, lots of questions. And we’ll come back to the FluMist in a minute and since David is here, he can handle that and also come back to the Nexium issue in a moment, Tony, on the volume and price equation and some of the mix. But maybe, Jon, maybe you can comment first on the re-investment and the margin issues.

[Jonathan Symonds:]

I absolutely did not say that none of it would drop to the bottom line. What I didn’t say was it all would necessarily either. I think there clearly are some choices. I mean, we talked about R&D heading to the 17% or 18% mark by the end of the decade. I think it’s probably more likely to get to the higher end of that given the speed that John is moving at now. If you take out six months, nine months out of a development program you do get more projects running into the later phase so I think there is an additional bolus of cost there. Equally we haven’t changed today the template performance that we see. We still see the ability to generate strong margins. This may give us the opportunity to grow them in excess of what we set last summer. I just don’t think at this stage that we really want to call out exactly how this is going to get re-invested. But don’t take what I said to Andrew’s question that there is nothing going to drop through or you’re not going to see it visibly. This is an important program. I think on Biologic’s not required, I think the simplest way to answer this is to say that our view is that we would have had to respect or invested at least $200 million in enabling CAT to develop, manufacture and optimize the antibodies that are coming through their development programs that we now don’t need to spend because we’ve got the assets and the capabilities at MedImmune. So these would have been revenue costs. These were people, they were headcount, they were expenses, and they were development costs. These would have been in our R&D costs for the year. MedImmune brings all of that capability with it and therefore we don’t need to make it, though I know we’ve talked in the past about it is cost avoided. These were real sums of money that wouldn’t have had products in development if we hadn’t spent it.

[David Brennan:]

All right, David, do you want to comment on FluMist and where we are?

[David Smiths:]

Let me just add a comment to Jon’s about investment versus operating cost. He’s absolutely right. We expect to avoid about $205 million a year in incremental operating cost on the AZ Biologic side. In addition, as you’ll remember from his slides it was around $500 million in actual capital investment that can be avoided because of the significant capital already in place at MedImmune at our main manufacturing site in Frederick and Gaithersburg, Maryland where we have our pilot production facilities and capabilities there. With respect to your question on FluMist we’ve actually made tremendous progress with the FDA over the last several months with negotiating what we expect to be final labeling for the label expansion below five years of age for young kids in the U.S. and have that we think ready to go. We also have made progress with the FDA and finalized our post-marketing commitments. What we’re waiting on right now and will be the gating issue on where we end up versus prior guidance is getting complete with a warning letter on our manufacturing facility here in the U.K. It was received in late May. We are currently working with the agency on that. In fact, we had a conference call yesterday afternoon and our current expectation is that we’ll be out of that if all continues to progress in time for us to begin shipping in September the vaccine. Assuming that, shipping beginning around the beginning of September we should be toward the bottom end of that prior range or four to five million doses of flu vaccine for this season. If there were further delay, then, obviously, that would jeopardize that.

[David Brennan:]

Oh, you want to give that to Tony; oh, you have one, all right. Go ahead on the Nexium and the volume and price trade off.

[Tony Zook:]

I think those are good questions. The challenge that we face I think David highlighted quite well, which is the generic omeprazole off about 50% in the quarter and for us to continue to grow we have to continue to leverage our platform of efficacy first and foremost. We believe we have a competitive advantage there and we’re going to continue to leverage that. But we also know that we’re going to have to continue to take share within the branded segment to an even greater degree than we have in the past. The first half of the year we’re up about .6 share points in the branding segment. We need that to accelerate. And that means we’re going to have to increase our access selectively; we’re not going to do this across the board, but where there is opportunity to grow volume and we think at a reasonable value equation, then we will do so and so I think what you will see is in the first half of the year our net price per capsule has been actually relatively stable in the marketplace, but I think you will see some widening of that in the second half. A good example of that would be the Defense DoD contract that we just secured. That goes in effect right now so you will see some widening as a natural cause of that.

[David Brennan:]

Okay, John, do you want to handle this CORONA trial question and then we’ll go one more to the floor and then we’ll go to Sebastian on the stream here.

[John Pattersons:]

Okay, the question is when will we see the results of the CORONA trial. The simple answer is the CORONA study has now completed very recently and so we’re now collecting the information and we’ll be processing it and as soon as we have that data we’ll be in a position to talk about it. Just to remind you that’s a study in heart failure patients. It’s not a straight, vanilla LDL lowering study. It is in ischemia patients, but not patients who would have been candidates for a statin primarily based on their LDL. So it’s a broadening of the indications for statin type of study rather than trying to show that it’s a best in class.

[David Brennan:]

All right. On the floor here.

[Kevin Wilson:]

Kevin Wilson from Citigroup with three questions. One for John or David, could you talk a bit more about the intellectual property buried inside MedImmune. You haven’t really expanded on that, are there technologies, processes, things that you may talk more about later in the year? Secondly, David could you talk about the political situation in the U.S. and how you see it panning out over the course of the next 12 months, 15 months. And finally, for David on the issue of staff morale, how is it being taken in the European organization with these large numbers of job losses?

[David Brennan:]

Okay, I’ll start and then, David, I’ll come back to you at the end for the IP comments about MedImmune, maybe a comment about what’s there. I’ll start at the bottom of the list there, Kevin, with staff morale. I think the announcements we’ve had clearly do have an impact overall. What we have tried to do is move clearly and quickly within each of the organizations that are affected with a message to the people who will be affected that they are and to the ones who aren’t that we need to be able to get back to work. I think the management process that’s been put in place both around communication, around working with the unions to make sure people understand and then having kind of at the top of the list the importance of the effect on the employees and what we can do to make the transition as smooth as possible has been our highest priority because we’ve recognized it’s a significant event. So our Chairman was just in Germany and came back and said he felt like they had done a very good job in managing it and he felt what the issues were, met with some of the people that had been affected and at the same time with people who were staying and felt we were getting a pretty good balance and I think that is typical of what’s also happened in Italy and in the U.K. and Switzerland where we’ve made other decisions. So that’s a tough one. The political situation pre-election, you know a tough one to call. You know being on the Pharma Board I get a number of different insights into that. There will be attempts at a number of different types of legislation, but it’s difficult to see how much of it will really get through because it seems that there are some bigger fish to fry right now and it seems like a lot of it will take place after the 2008 elections when the potential exists for a change overall and maybe a different mindset. Hard to read. I think the follow-on Biologics is a good example because there were some political statements made about people saying we are going to put a follow-on Biologics legislation through because it should be just like generics. And then as people began to unravel the complexity of some of those issues they recognized you can’t just push legislation like that through and call a follow-on Biologic a generic because it’s just not the case. And it’s the same with importation. I think we saw one of the Democratic senators, very uncharacteristically bring forward safety language for the importation bill that was approached because it’s somebody who really understands what the issues are around importation, recognizes that there has to be some kind of safety provision and not just a bill that says let’s go ahead and put importation in place and see what happens. So, there is some balance that takes place in a lot of these issues and when that happens I think there is some rational decision-making that happens. David, do you want to comment on IP and MedImmune, maybe give people a sense of some of the things that are in place some of the other pieces?

[David Smiths:]

I’d be happy to comment on that. MedImmune has a very broad portfolio of intellectual property, both property protected by patents and property protected by know-how and trade secrets. We’ve been at this since 1988 when the Company was formed and have really been one of the early leaders in protein antibody engineering as well as vaccine development. I would characterize our proprietary position as falling into several main areas. First of all, if you think about antibody technologies, really all things related to antibodies, MedImmune has a very deep portfolio of existing patents, patent applications, trade secrets and know-how, (inaudible), antibody derivatives; all of those areas are areas where MedImmune has been doing very, very significant research and has existing patents and patent applications and trade secrets. On the vaccine side of the business we also have real core capabilities that are industry leading in the areas of live attenuated vaccines, also in the areas of vectored vaccines and subunit vaccines. Many of you may be familiar with the HPV vaccines currently being launched by both Merck and GSK around the world. Much of that early technology was really developed in our labs in Gaithersburg at MedImmune. The virus-like particle technology that lies beneath and enables both Merck and GSK’s vaccines was developed up through Phase II at MedImmune, and then licensed to GSK and subsequently Merck. So a lot of core expertise in the vaccine area, as well as in the antibody area. Another area that I would highlight where we have very strong capabilities and proprietary positions is in our process development and manufacturing of biologics. Clearly MedImmune has been a world leader, if not the world leader, in protein production. With Synagis now we have commercialized the manufacturing process where we see about 3 grams a liter of bulk production, with 85% to 90% purification yields, which is absolutely world class. We actually have a new process ready to go into commercial development with Synagis, which is over 5 grams a liter. So continuing to move that forward. We also have led the transition out of animal protein containing production processes, and now have all of our processes at the company are animal protein free, which is another big technological advance. So as you think about scaling up production of and then optimizing commercial yields for production of protein, that is another area where MedImmune has tremendous proprietary positions and world class capabilities. Specifically around patents our lead product, Synagis, which is the largest commercial product currently in the portfolio, generating over a billion dollars a year in revenues currently, has very extensive patent protection. It goes well out into the future. The first composition of matter patent doesn’t expire until the fall of 2015, and then we actually have additional patents, formulation to other patents, that run through 2023. And as John Patterson mentioned in his presentation, we have a next generation antibody against RSV that we hope to actually replace Synagis with in the marketplace that has patent coverage that would go out well into the 2020s time frame, so very strong intellectual property.

[David Brennan:]

Thank you, David. Let’s go to question number two on here, Sebastian Berthan from Exane Paribas. Sebastian.

[Sebastian Berthan:]

Hello. Two questions, please. One is to come back on the guidance you have put towards to within the last year on the sales side, it was just like it to be close to around the pharma market growth in 2010. Is it still something you believe is achievable given the slow down of some of the products and a number of pipeline disappointments? And secondly with regards to DAPA (inaudible) following the Phase II results, to what extent may urinary infections could be an issue for the profile of the drug?

[David Brennan:]

I’ll take the first one. I think the pharma market growth issue is something that we will continue to target ourselves towards. I think there have been some of you that maybe the projections would go down a little bit, but I still don’t see with our portfolio any reason why we should not be growing in line with the market from a value perspective globally. I believe we can and should be able to do that, and so that will be our target. John, do you want to take the DAPA question?

[John Pattersons:]

Yes. I think it’s a good question. Diabetics do have an excess incidence of urinary tract infections and increasing the sugar in the urine is obviously a concern to some people. In the studies to date there have been a relatively low incidence of UTIs, and it’s been absolutely manageable and very few people have come off study as a result of it. Obviously it’s one of the key things we’ll continue to look at as we go through the program, but to date it has not been a big issue.

[David Brennan:]

Okay. Let’s go back to the floor, then there’s a quick e-mail question, and then Steve Scala has a question online here. One the floor in the back, please.

[Marietta Minutes:]

Marietta Minutes from Dresdner Kleinwort. A few questions, please. The first one is on 4054. My understanding was that the oncology community overall was moving more from overall survival to progression free survival, specifically because overall survival tends to be more distorted by subsequent treatments. So I’m not sure how you expect to avoid some of the issues that people have just raised earlier in the meeting by focusing more on overall survival. My second question relates to the growth margin. I completely understand that given uncertainty around R&D you don’t want to commit to a certain operating margin development. But just to clarify, at the beginning of the year when you announced the supply chain rationalization program you said that the $500 million spend was needed to protect margins. I now understand from the press release that now that you’ve stepped that up you actually see potential to improve the underlying growth margins. Can you just confirm that that is the case? And my final question really relates to the SG&A restructuring. I’m just really having some trouble understanding that conceptually, because presumably a lot of that is not actually fat, and I don’t really see any of your competitors doing anything on a similar scale. So maybe you can just give us a little bit of flavor as to why you suddenly realized that you have so much cost you can take out, where sort of functionally speaking a lot of the savings are coming from, what products are really going to get reduced promotional support, and whether there actually is risk that you will ultimately have to reinvest in the business given that the benefits basically from this are going to be coming through just when the next generation of products are launching? I’m really just trying to better understand the whole concept of this SG&A restructuring. Thank you.

[David Brennan:]

John, do you want to take the question on overall survival versus progression free and what some of the issues are?

[John Pattersons:]

Your premise is absolutely right taken across cancer as a whole, though there are some specific issues about prostate cancer that make a difference. These are patients who have bone-in metastases, usually multiple bone-in metastases, and of course they’re osteoblastic, not osteolytic. And as a result, the only thing you have to measure on PFS is the bone scan, and multiple hot spots don’t tell you whether there is healing on new lesions. And then the other thing is pain. So actually progression free survival is a hugely difficult to go with in homo resistant end stage prostate cancer, which is where we are. The second thing is usually in tumor studies there are multiple different therapies given post the therapy that you’re measuring, and therefore you get a confounding of your results by those subsequent therapies. Because these are people who have virtually reached the end of the line, there is virtually no other therapy, and what we’re doing is making sure that those that do get chemotherapy, and they’re going to be the minority, have it in balance between the two groups and they’re followed-up in the appropriate way. Hence the specific issue of PFS versus overall survival in prostate cancer.

[David Brennan:]

Jon, do you want to talk a little bit about the margin issue and certainty versus uncertainty.

[Jonathan Symonds:]

I think the logic is good. The first program was to protect gross margins around 80%. We’re now accelerating and expanding that project, so it either increases the confidence that we’ll keep it 80% or potentially do a little bit better than that. We have expanded the scope of the opportunity that we see around making our cost of sales more productive.

[David Brennan:]

And I’ll take the SG&A. I’d like to separate the sales and marketing expense from the G&A expense, and start with G&A. G&A is, I think was said during one of our presentations, we’re really focused on trying to significantly reduce and operate more efficiently in a lot of the support areas. And you see that in the IBM contract, in reductions in support staff, and areas where we can either operate more efficiently or get it done by someone else better. I think in the sales and marketing side what you see us doing is sizing ourselves for the opportunities that exist in the market. So Germany is an example where last year their reimbursement for Nexium was reduced by 40%. We had sized our business there around Nexium, as well as around Crestor, which was not introduced there. We had waited for a while to see how we could work it up, but ultimately decided we needed to size our capacity to take advantage of the market opportunity. And we’ve done the same thing in some of the other markets where you’ve seen changes take place. The same situation with Nexium is happening in Italy, and we need to hold our leadership in those markets accountable for that. I don’t think of it as fat, I really think of it as where are the opportunities, where do we want to be investing, because they the same token we are increasing the numbers of people that we have in emerging markets like Asia-Pacific, we’ve added in China, we’ve added in Mexico and Russia in the last year where there are market opportunities that present themselves in a different way. And we will continue to do that. The same thing has been done in the U.S. where there is more reliance upon contract sales organizations, so it’s not as significant an AstraZeneca issue, but we do go up and go down the ladder a little bit. I think you should expect us to continue to do that. Our target is to improve our overall SG&A to sales to make it much more industry competitive. John, do you want to take the quick question on the e-mail and then we’ll go to Steve Scala at SG Cowen.

[John Pattersons:]

Yes. The question is, ‘Does guidance presume FluMist availability in the U.S.? And if we do not launch FluMist where does guidance shift to?” I think the simple answer, the $0.15 variation in our guidance, is about $350 million, $400 million, so I think we have that risk covered.

[David Brennan:]

Good. Steve Scala at SG Cowen. Are you still there, Steve? You’ve been hanging for a while.

[Steve Scala:]

Yes I am. Thank you. Two questions. What has Glaxo’s response been to your modest dip down on SYMBICORT in the U.S.? Have they met your discount or are they arguing some sort of superiority? And I’m curious as to why AstraZeneca is going to specialists first when the product doesn’t represent any sort of novel concept. Why not just flood the market with your message? And then secondly, with respect to your Nexium outlook, is there an embedded assumption on why its success in protecting Protonics from an at-risk generic launch next week? Or is something like that not considered?

[David Brennan:]

The second one was about is the Nexium strategy contingent upon the potential for Protonics generic launch- is that considered or not. So do you want to take the first one, though, around the GSK response? And the specialist first versus primary care?

[David Smiths:]

Let me deal with the second one first on specialists and primary care. Just to put it into context, it was literally just a gap of about two to three weeks. It was a matter of just us rolling out the training messages and etc. So our specialist launch started about three weeks ago and our primary care launch, in fact, starts this week. And so it’s not a significant gap, but we did want to get to the pulmonologists and allergists and make sure that they were well aware of our core messages as we then brought messages forward into primary care. So the launch effectively with primary care starts this week, and we’re very excited by that. Relative to our managed market access, you’ll have to be very specific with your question I guess to Glaxo, but I can tell you what’s happening in the U.S. market dynamic. Right now we have achieved access rates in excess of about 55% of the covered launch, so we believe that we are in very, very good position. In fact, it’s one of the strongest positions we have ever had going into the launch within the U.S. market. Payers seem to be very, very open to the idea of having alterative products available to them, and so that has been very well received, and it has not taken significant discounts to do that. I think the strong message around speed of onset of action has also played very, very well. So we’re well positioned in managed care, better than we’ve ever had at launch platform, and to this point we’ve not seen a significant pricing reaction anywhere in the marketplace.

[David Brennan:]

And Nexium strategy as it relates to assumptions about other products.

[David Smiths:]

No. It’s (inaudible).

[David Brennan:]

You expect (inaudible) to stay the same.

[David Smiths:]

Yes.

[David Brennan:]

I’m going to ask everybody to limit to one or no more than two questions. If you have more than that we’ll back to the floor and then we will go to the screen real quick to Andy Cosen at Redburn Partners. But let’s go to the floor first. Next question.

[Michael Decort:]

It’s Michael Decort from ABN Amro. Just one general question, really. I just caught a destabilization in market share though the generic erosion of the (inaudible) class really in the statin arena. A similar thing seems to be happening in the Nexium arena. What do you think your risks are for the rest of your portfolio? And then what’s the real implication for sort of the longer-term in the headline pricing of the products and price rises going forward?

[David Brennan:]

I’ll take a shot at that. I think there are some similarities between the statin and PPI markets right now, and I think what we’re seeing emerge is that there is a market for the low price generics as a first line therapy for a lot of people and then there continues to be a market for a branded product that has a better profile. I think it’s very evident in the statin market and know in the PPI market we see people who definitely want to have Nexium, and we have managed care plans that want to have it on their formulary and push us to be more competitive with it. But the fact is I think we’re going to see, over time, two very significant segments emerge. And we recognize that Crestor is a product that’s better suited for patients that are at higher risk, not necessarily low risk people who just need a statin for starters. The same with the PPIs. To the rest of the portfolio, I think it’s probably less of an issue. I think with the a typical anti-psychotics, as John said in his talk, the one thing you can see in that chart he showed is that they are atypical in the way patients respond to them. That uniqueness, given the nature of the psychotic disease and the issues people are dealing with in that area, are significant enough to allow for differentiation. So I think we have a pretty clear— There will be some pressure; I don’t doubt that. But I don’t see it in any way equating to what’s going on with statins or PPIs. Do you want to add anything to that? Okay. Can we go to Andy at Redburn Partners. One or two questions, Andy.

[Andy Cosen:]

Just the one. Thank you for taking the question. It’s on the right sizing of your marketing and sales in Europe. You just said the changes you’re making they look to be related to factors that have happened already or come in the near term, say Germany and Italy. So does that imply when Nexium goes generic in Europe in 2010 that there will be scope for much further and deeper cuts or is this partly a reaction to that impending event?

[David Brennan:]

It’s difficult to project out the situation in 2010 in Europe given what we see happening right now. The market has slowed in growth now down to overall value growth in Europe is 1% or 2%. So I think we will really look a year or two in advance and try to anticipate what those markets will look like and size ourselves accordingly. Hopefully by 2010 we will be having some product launches around some of the new products, in which case we expect to be using up a lot of our primary care capacity. That’s why we’re trying to maintain it and keep it in place, because we have out performed the market overall with our primary care products across those markets. So we want to keep the capacity in place and get it utilized. That’s why we’ve been so active in licensing and business development. We’ll go to Jill Walton on number two on the screen. Jill.

[Jill Walton:]

Thank you. Just two quick questions. Could you please tell us roughly what the R&D spend is that you’ve externalized in the first half of the year? I think we all still find it quite difficult to get to grips with the new capitalizations of the policy. But now that you have this relationship with Bristol, under the old way of looking at things, how much R&D spend are you putting in there that we’re not actually capturing through the R&D charge?

[David Brennan:]

Jon, do you want to take a shot at that?

[Jonathan Symonds:]

If you take Bristol Myers, I think the upfront payments were something of the order of $250 million in the balance sheet, and substantially more than that going through the cost lines. So I don’t believe that if you structure these deals properly, with up fronts and up fronts then following when you get risk milestones, the vast majority of the development spend comes through the P&L. So I don’t really believe that we’re distorting the R&D cost in the way that you think. But that could well be a subject for a private session.

[Jill Walton:]

But based on the marketing, and you’ve managed a two point improvement in your SG&A in the second quarter of this year (inaudible).

[David Brennan:]

I’m going to then take Chairman’s prerogative. We’re almost out of time and I wanted to recognize John as this is, I’ve said before, his last session with us, and thank him for everything that he has done to contribute to the success of AstraZeneca, both the creation of AstraZeneca as well as the success of it. I’ve worked with John since the time of the merger, as I said to him before, we’ve been colleagues and then we became friends and we’ve worked well together. But more importantly, I’ve been able to see the contribution that he’s made, and I just would like to acknowledge to all of you who participate with us like this pretty regularly that John will be missed as a colleague and as a friend. We certainly wish him well in his new role, and we’ll look forward to catching up with you in your new role. I though maybe you had a few reflections that you might like to give us before you go.

[John Pattersons:]

Yes. Thank you. I think this is analyst conference at least 40; I haven’t quite added them all up. I know it’s 30 consecutive AstraZeneca results conferences, but I think it must be well over 40 with Zeneca. I think I’d really just like to leave you with a few of my thoughts. Number one, this is an outstanding organization. And it’s an outstanding organization that has been founded from having outstanding people in it. I think if you look over the seven years of its formation and the challenges that we faced at the time of the merger with why do you put two companies together that have 50% of its top line under threat, how do you deliver industry leading synergy levels at the time, how do you get over the disappointment of the pipeline three years ago. I think in each case this organization has delivered. And so when you think of the challenges that the company and the industry face as you look at it through a spreadsheet, don’t forget the people that lie behind it, because they can do extraordinary things. I think the second point I’d like to just make absolutely clear, in case there is any shred of doubt, I was involved in the identification, evaluation, the negotiation, the pricing, and the implementation of the MedImmune acquisition. And I think that you will see this to be an outstanding deal that gives AstraZeneca, and the outstanding people within MedImmune, a real competitive advantage by having capabilities that are simply not available anywhere in any form in the market today. And I think the third point is this is a management team that is tackling the industry in a way that I don’t believe anyone else is. Just add up the number of major initiatives that are going on here, and I think that this is a management team that is determined to succeed. The final point is a really big thank you for everybody here and everybody that I’ve been involved with through the market. It’s been challenging, but on every occasion it’s been constructive, it’s been fair, and you’ve taught me a lot. I thank you for that.

[David Brennan:]

John, thank you. With that then let me thank everyone for your attention today, as well as for your questions and for your interest. We will be around for a few more minutes. Thank you to all of you on the line as well.