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Executives

Simon Lowth – Executive Director and Chief Financial Officer

Ed Seage – Investor Relations

Analysts

Tim Anderson – Sanford Bernstein

Peter Verdult – Morgan Stanley

Sachin Jain – Bank of America Merrill Lynch

Matthew Weston – Credit Suisse

Steve M. Scala – Cowen & Co. LLC

Brian Bourdot – Barclays Capital

Mattias Häggblom – Danske Bank

Nicolas Guyon – Exane BNP

AstraZeneca PLC (AZN) Q1 2013 Earnings Call April 25, 2013 7:00 AM ET

Operator

Good afternoon. Welcome, ladies and gentlemen, to AstraZeneca's First Quarter Results Analyst Conference. Before I hand over to Simon Lowth, I'd like to read the Safe Harbor statement. The Company appends to these slides the Safe Harbor provisions of the United States Private Securities Litigation Reform Act of 1995. Participants on this call may make forward-looking statements with respect to operations and financial performance of AstraZeneca. Although we believe our expectations are based on reasonable assumptions, by their very nature, forward-looking statements involve risks and uncertainties and may be influenced by factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements. Any forward-looking statements made on this call reflect the knowledge and information available at the time of this call. The Company undertakes no obligation to update forward-looking statements. I will now hand you over to Simon Lowth.

Simon Lowth

Well, thank you operator and good afternoon to everybody on the call. Let me start with a couple of things. Firstly, to tell you that all of you that I've contracted some sort of cold over the last couple of days, so I’ll take occasional pauses as we go through this call to take a glass of water, so hope you’ll forgive me for that. But as we move then into the call, let me just start by saying that we posted a set of slides on the investor page of our website and they'll follow along with my presentation. And what I'll try to do as we go through is cue the slide numbers as we go along so that you can follow.

So turning to the first content slide, which is slide number 4 in the pack, it's been a few short weeks since our Investor day on 21 of March and at that meeting Pascal and the AZ management team laid a clear articulation of our strategic priorities. Firstly to achieve scientific leadership, second to return on company to growth and third, and importantly to be a great place to work for AZ people. And I'd say that the energy of the entire organization is focused behind undertaking the important task of executing on these priorities.

And over the last few months in the run up to and of course following that meeting, which made good progress, our drive towards scientific leadership has been enhanced by four important business development agreements. So with Moderna therapeutics, the Karolinska Institute, AlphaCore Pharma and then BIND Therapeutics, all of which put us at the cutting edge of the important new technologies that will bring important new medicines to patients.

Our five growth platforms, so that's Brilinta, the diabetes franchise, emerging markets, respiratory, and then Japan, well, all five contributed incremental growth in the first quarter, although clearly they couldn't make up for the expected revenue loss from patent expirations in the quarter. And we're also working apace to simplify our business and to drive continued productivity, as evidenced, as you'll have seen by the quick start to phase four of the restructuring program that we laid out at the Investor Day.

So good progress on implementing our three key strategic priorities, but our focus today of course, is the first quarter results, and I’m going to cover five topics. I’ll first summarize the headline numbers, then I’ll cover the revenue performance by region and for selected brands and then I'll turn to the core operating performance and put an emphasis on the key drivers of operating profit and margin; I'll briefly touch restructuring and cash flow; and, finally, I'll close with our thoughts on guidance for the full year. So on to the headline results and that's slide five in deck.

Total Company revenue was $6.4 billion in the quarter, that’s a 12% decline in constant currency terms. Revenue declined by 13% on an actual basis as a result of the negative impact of exchange rates movements chiefly the Japanese yen. Once again the dominant feature of our revenue profile in the first quarter is the loss of exclusivity on several brand Seroquel IR and Atacand in many markets and Crestor in Canada. These three products alone were down more than $900 million compared to last year. I’ll discuss the regional and brand performances shortly, but let’s just continue with the headline numbers, so core operating profit in the quarter was down 31%, core operating expenses were 4% lower than last year in constant currency terms, the revenue was down more and together with the impact of lower core other income has drove the core operating profit decline.

Core earnings per share in the quarter were $1.41 compared with a $1.87 last year the $0.21 decrease in constant currency terms is in line with the decline in core operating profit, as the benefit from a lower number of shares broadly offset the higher tax rate in the quarter. Adjustments to core financial measures, at $0.60 per share, were the same for both periods, although with a different mix, with higher restructuring last year and higher amortization this year. When applied to the lower core EPS base in 2013 this resulted in a larger decline for reported EPS compared to core EPS. So overall reported EPS was down 31% to $0.81.

So those are the headlines for the first quarter, move onto the slide 6 and look at the first quarter revenue performance, now when I refer to growth rates here it will be on a constant currency basis. The first thing to mention on revenue is that we’ve made a slight boundary change to our regional breakouts for revenue. What is reported in Europe is now revenue from Western Europe combined with many markets that were previously reported under emerging markets. We’ve provided eight quarters of restated history to help you calibrate your models and you can find these on the investor page of our website.

So with that bit of housekeeping out of way, let’s look at the revenues, revenue in U.S. was down 16% compared to the first quarter last year, driven by loss of exclusivity for Seroquel IR, if we exclude Seroquel IR, the rest of the portfolio increased by 3% in the quarter, first quarter revenues include $78 million related to our share of sales of the Amylin diabetes portfolio which wasn’t in the prior period, and there was growth contribution from Symbicort, Brilinta and the Onglyza franchise.

Revenue in Europe was down 16% in the quarter, chiefly due to the loss of the exclusivity for Seroquel IR. There was also a generic erosion on Seroquel XR following some adverse patent judgments and at-risk launches, particularly in Germany. The continued impact from the loss of exclusivity for Atacand and Nexium also fueled the revenue decline. Revenue in established Rest of World was down 17% and that’s largely a Crestor story, the loss of exclusivity for Crestor in Canada and on top of that, pricing pressure in Australia.

Revenue in Japan was up 5% we saw good growth for Nexium, good growth for Crestor and, indeed, for Symbicort. Revenue in emerging markets was up 9% in the quarter, that’s an improvement from our exit rate in the fourth quarter of 2012. Although increases in Saudi Arabia, stable revenues in Brazil and Turkey played their part, it was really the 21% increase in China that was the primary driver of performance. China sales were fueled by good growth for Seloken, Nexium, Crestor and Iressa. Looking towards the rest of the year, in addition to continued growth in China we expect to see a broader set of markets contribute to the overall emerging markets' performance.

Slide 7 provides a snapshot of revenue for our key brands. In addition to the regional growth platforms of emerging markets and Japan, as you can see here our brand growth platforms, Brilinta, diabetes, and Symbicort all contributed incremental revenue in the quarter. Crestor was down 11% but it would have been flat except for the generic erosion in Canada. And at the bottom of the slide you can also see the significant impact from loss of exclusivity for Seroquel IR and Atacand.

Detailed commentaries on brand performance are in the press release, but I’d like to just provide some additional color on three growth platforms, so Brilinta, diabetes and Symbicort, and I'll also touch on Crestor. So firstly, Brilinta, and that's slide eight. Sales were $61 million in the quarter with $30 million in Europe and $15 million in the U.S. We continue to implement our plans to build this important brand that we outlined in our Investor Day a few weeks ago. On slide 9, we've rolled forward this graph of Brilinta's new-to-brand performance in the U.S. for the most recent weekly data.

And it shows a continuation of the growth trends from January, with the usual dip for the Easter holiday week. We exit the first quarter with weekly new-to-brand volumes up 30% compared to the entry point in January. Performance outside the U.S. continues to build. We can increasingly use the regular IMS data to track progress instead of relying on survey data. And you can see on slide 10 these graphs showed steady progress in markets like Germany, Italy, the UK and Australia.

Now turning to the diabetes franchise, starting on page 11, slide 11, revenue for Onglyza was up 27% to $90 million in the quarter. Alliance revenue in the U.S. was $64 million. That was up 19%, now total prescriptions for DPP4s in the U.S. has slowed but was still double digits in the quarter, up 10%. Total prescriptions for our franchise of Onglyza plus Komboglyze XR were up 9%. Now, we did lose share during the quarter. Our market share of TRx was 16.1% in March. And that is off by a 117 basis points from December 2012.

This is an increasingly competitive category. We've experienced some losses of preferred formulary positions in managed care plans, as this experienced a decreasing share of voice relative to competitors. We are focused on pulling through volume where we’ve got strong access and we will continue to compete vigorously in this market. Outside the U.S. our share of Alliance revenue for Onglyza was $26 million that’s up 53%. And there have been further European launches of Komboglyze during the quarter.

Moving on to slide 12, and first, the GLP-1 franchise. The first quarter includes $69 million in revenue from our share of the Alliance's Byetta and Bydureon sales in the quarter. The re-launch of Bydureon by the Alliance has driven weekly new-to-brand volumes to a 15% increase compared to their October baseline with new-to-brand share up 1.5 percentage points in that time. And starting April 1st the Alliance has now assumed responsibility for the exenatide products outside the U.S.

Forxiga revenue was a $1 million in the quarter, reflecting the fact that the launch rollout in its very early stages following approval in November of last year. The initial feedback we're getting from physicians is really quite positive towards this new treatment modality.

Now, as seen on slide 13, Symbicort sales were up 14% to $826 million. Sales in the U.S. were up 32%, Symbicort's total prescriptions were up 15%, compared to just 3% for the fixed combination market and our share of total prescriptions and share of new patient starts were both up during the quarter.

Sales in the rest of world were up 7% on growth in Europe and continued market share penetration in Japan on the back of the launches of Symbicort Smart and the COPD indication. And then finally, turning to Crestor that’s on slide 14. Now, sales were down 11% in the quarter to $1.3 billion due to the loss of exclusivity in Canada, well otherwise sales would have been flat.

Sales in the U.S. were down 4% to $652 million. Total prescriptions were down 7% compared to the first quarter last year. Realized prices were up, but that's attributable to the Medicare coverage gap adjustments that were put through in the first quarter last year, otherwise, realized prices would have been slightly lower in the quarter. And we continue to expect lower pricing for the balance of the year.

Sales in rest of world were $671 million down 16%, excluding Canada rest of world sales were actually up 5% on some good growth in Japan and in China. As you model Crestor revenues for the rest of the year you should recall that a ruling from the court in Australia invalidated three patents and we would expect that generics will achieve listing for reimbursement around the mid year.

I'll now turn to the first-quarter P&L, which is on slide 15, our focus here on core margins and profit. The press release does of course contain the statutory numbers and a detailed reconciliation to the core measures and as with sales, when I refer to growth rates that will be on a constant currency basis.

Core gross margin in the quarter was 82.2% of sales that is up 90 basis points compared with the first quarter last year. Product mix was unfavorable, however, core gross margin benefited from lower core Merck expense related to the second-option amendments implemented in the middle of last year. Core SG&A expense was down 2% compared with the first quarter last year.

Benefits from restructuring programs and overall lower selling and marketing expenses in developed markets more than offset selective investments in support of emerging markets in Brilinta as well as taking on our share of the selling costs for Byetta, Bydureon and Symalin.

Core other income was 36% lower than last year on lower Zomig royalties and the absence of some one offs in the first quarter of 2012. That leads to a core pre R&D operating margin of 51.5% of revenue and is 350 basis points lower than last year as the slightly higher core gross margin as a percent of revenue is offset by the lower Core other income and the higher SG&A expense as a percent of revenue.

Core R&D investment in the quarter was $963 million that's 7% lower than last year, we continue to realize savings from our restructuring programs. The phasing of clinical project costs also drives the favorable variance as spending winds down on Phase 3 trials for projects like fostamatinib and naloxegol. These savings provided more than enough headroom to accommodate the spending for new in-licensed acquired or partnered projects.

Now, you'll recall that we've guided to core operating costs, so that’s combined core SG&A and R&D costs being held to a slight increase in 2013 in constant currency terms and that is indeed our expectations. So I would view the 4% increase in these costs in the first quarter as a matter of phasing we will continue to make the investments behind the growth platforms and pipeline through the course of 2013. Core operating profit was $2.3 billion in the quarter, 21% lower than last year, core operating margin was 36.4% of revenue 4.4 percentage points lower than last year.

Just a brief word on restructuring, on slide 16, you can see the scope of what we are now referring to as phase four of restructuring. And this combines the initiatives newly announced last month compared with the actions or together with the actions that remain to be implemented from the phase three program that we announced back in February of 2012. Total program costs are estimated to be $2.3 billion and you can see here that we've charged $543 million to the P&L in the first quarter.

Turning to slide 17 cash generated from operating activities was $2.2 billion in the quarter, compared with $1.5 billion in the first quarter of 2012. Lower tax and interest payments partially offset the lower operating profit in 2013. Whilst the one-off pension fund contribution drove higher outflows in the first quarter last year. We also paid the second interim dividends for 2012 in the quarter. That amounted to $2.3 billion.

So finally, turning to guidance, and that's slide 18, in your pack, we continue to expect a mid to high single-digit decline in revenue in constant currency terms for the full year we will continue to face headwinds from loss of exclusivity indeed since the start of the year we've received an adverse ruling on Crestor patents in Australia and we'll see continued erosion of Seroquel IR, Atacand and for Crestor in Canada.

However, the prior-year comparisons will improve as the 12 months anniversaries are met. So despite the new challenges and the double-digit revenue decline in the first quarter we maintain our revenue guidance for the full year. It's actually a similar story on cost despite the 4% decline in combined core SG&A and R&D expense in the quarter, this is a matter of phasing, and we continue to expect a slight increase in core operating costs for the full year in constant currency terms.

With the revenue in cost profile in line with guidance we continue to expect core earnings per share to decline at a rate significantly higher than the decline in revenue this year. One final item, as you will recall on the 1 of April the U.S. District Court for the district of New Jersey ruled one of our patents protecting Pulmicort Respules invalid and further ruled that the generic defendants do not infringe a second patent. In that announcement we disclosed that revenues of Pulmicort Respules in the U.S. were $135 million in 2012, and royalties represented an annualized value of approximately $260 million under core other income. There is currently a temporary restraining order in place. While the U.S. Court of Appeals for the Federal Circuit considers our pending motion for a longer injunction pending appeal.

We have no further news recorded this time, but just to remind you that should additional generics enter the market both Pulmicort sales revenue and royalty income will come under significant pressure and I'm sure you'll want to adjust your models accordingly. As for currency, exchange rate movements created a 4% negative variance to core EPS compared to last year, but it was neutral to core EPS versus our January 2013 guidance rates in the quarter.

I would remind you, though, that our guidance takes no account of the likelihood that average exchange rates for the remainder of the year may differ materially from the January 2013 average.

So with that we’ll now move onto the Q&A session and I'll ask the operator to come on and provide instructions and then get into your questions.

Question-and-Answer Session

Operator

(Operator Instructions) thank you.

Simon Lowth

Thank you operator, now I see Tim Anderson of Sanford Bernstein. Tim, over to you first question.

Tim Anderson – Sanford Bernstein

Well, thank you very much, couple of questions, if I can, on Crestor previously the Company said that they expect the product to hold up pretty well through generic Lipitor in the U.S. In Q1 as you pointed out, prescriptions were down 7% year-on-year. And I'm wondering if you can talk about what you expect with this product in the U.S. Going forward to its patent expiration in 2016 do you think the decline in prescriptions in the U.S. specifically could continue to accelerate?. And then another question, which is, are you willing to say yet, is Astra willing to say when they think the trough year will be in terms of revenues or earnings?

Simon Lowth

Tim, thanks very much for those two questions. On Crestor, we continue to believe that Crestor has a very clear positioning in the statin market for higher-risk patients and we continue to see the brand perform well. The impact in terms of first quarter performance was particularly associated with changes in managed care and formulary position but Ed Seage, would you like to pick up and talk a bit more about what we saw in the first quarter and how we see the brand moving forward and then I will pickup Tim’s second question.

Ed Seage

Sure. It’s really not a function of actually losing positions in managed care. It's the function of plan years rolling over, patients enrolling in new coverage schemes, we typically see at the beginning of every year an uptick in the number of switches away from Crestor to generic products and that’s exactly the same pattern we saw this quarter, where you see net switches from Crestor increased and we’ve already seen and again like we’ve typically seen a recovery in that net switch rate, as we exited the quarter. So it's a fairly typical, what I would call almost a seasonal effect, or you see when a rollover of plan years we see an uptick in switches to generic which then kind of unwinds over the course of the quarter.

Simon Lowth

Yeah, and I think Tim, we have seen as we watch obviously the scripts pretty closely and I think as Ed was saying we’ve seen a trend back once we moved through those changes in formulary positions. I would also say that when we look at the prescribing base of Crestor it remains and some mid 90s people who are continuing on with that Crestor therapy, we see very clear positioning of the brands for high risk patients we see with real resilience in the higher dosage, but it’s fair to say where we do see pressure on the scripts volumes it tends to be in the lower dosages which is exactly what we do expected and I think then you are going to see that story continue out over the coming years, with some pressure in the first part of the year, but then continued resilience with Crestor patients going forward. The second question, sorry did you have a comment to make?

Ed Seage

One other thought is, if you recall about around the mid year, last year, we started seeing a decline from our Medicaid segment business and that will annualize until mid year as well, that’s another factor in the early year performance to keep in mind.

Simon Lowth

Yeah, thanks Ed. To your second question Tim on the trough year, I mean I think you will know the question that a number of people have asked us and we've been rather stubbornly resistant in giving that precise 12-month period. And our reason for that is we don’t want the organization, we don’t want us to do sort of focused on one particular 12-month slice. The shape of the revenue profile for the company is going to defined by the interplay of three factors, we see continued resilience and stability in sort of established product within our portfolio, particularly aided by good growth in emerging markets for some of those established brands. We know that loss of exclusivity will continue to impact the top-line with the most notable event still to come being Nexium in the U.S. and then Crestor in 16 and 17.

So when we return to growth it’s going to be a function of success in driving our growth platform, they all grew in this first quarter, we are investing heavily behind them, but we don’t want to concentrate down on one particular 12-month window. I know you’d love us to give that Tim, but we just don’t think it’s right for us to be focused on that. We need to drive the business for success over the long-term.

Tim Anderson – Sanford Bernstein

Thank you.

Simon Lowth

No, Tim, thanks a lot. I’m going to move to the second question on the line here, which I think Peter Verdult from Morgan Stanley. Peter your questions.

Peter Verdult – Morgan Stanley

Simon this is Peter, Morgan Stanley, just a few with over a number of companies recently this week on reporting that inventory levels across retail pharmacies and the distributor channels in the U.S. running on characteristically low levels. Just wondering whether that's been a factor for Astra and if so whether you can give some sort of the ballpark quantification? Can I just dig a bit, secondly can I just dig a bit more on the diabetes franchise? I mean, the landscape is well known, the formulary lost on Caremark is well known, but it does seem that the franchise versus the expectations quite soft. I just want to know what explicitly you're going to try to reaccelerate those trends and whether there's any update as to when the SAVOR data will be released.

And then lastly, just a very quick one. If the Phase III data for OSKIRA, the last few OSKIRA programs fostamatinib match the same sort of profile that we saw in OSKIRA-1 is it fair to say that Astra will not proceed to file that product for rheumatoid arthritis? Thanks.

Simon Lowth

Okay, Peter, thanks for the questions. Sorry, let me perhaps deal with them in reverse order and perhaps ask Ed to comment on inventory levels. So, on OSKIRA, we're going to wait for the data from the remaining OSKIRA trials, I’m not going to speculate on the outcome of those and the, not that long before we’ll see the results and we can then access the medicine and the prospects in the lights of those.

In terms of diabetes I think, this remains an absolutely critical growth platform for us, we, as an alliance with our strong portfolio. We and BMS are clearly very committed to the long-term success of the business. Onglyza and, indeed, exenatide continue to show decent year-on-year growth and we've seen a pretty encouraging start for Forxiga, but as you picked up Peter and indeed we have, that we have seen some headwinds to that growth I think you've all seen a slowing in DPP4 growth and, in part, that's got to do with the annualization of the slowdown and substitution out at other categories last year.

We’ve seen intensifying competition and that's put share of voice under pressure in some markets particularly the U.S. And, as you yourself referred to, and I mentioned in my notes, we've seen a loss of some key formulary positions specifically came out. So those have been some headwinds, but we are taking a whole series of actions in order to ensure the long-term success for that business we’re stepping up sales and marketing investment behind the brands and remain committed to that.

We’ve obviously putting increased investment behind Forxiga where it's approved and as I mentioned encouraging start to that brand in markets like German, of course we're getting stuck into the launch and promotion of exenatide in the Rest of the World markets from the April 1.

SAVOR is going to be an important catalyst I think (inaudible) Q2, I think is when we'd expect SAVOR, no new news on that for you at Q2. We got the certificate filing in the U.S. around the mid year and then of course the dual-chamber pen for exenatide for Bydureon in Q3 for the U.S and in Q4 for Europe. So, a lots of activity in investments really behind the portfolio and we look forward to seeing that continue to grow over the remainder of this year.

In terms of inventories in the U.S. I mean, we obviously have distribution service agreements with the majority of our customers and that contains the amount of inventories and ranges and penalties either side, but Ed is there anything particular you want to add, that we've seen.

Ed Seage

Yeah, there is nothing in aggregate that’s worth calling out if you’d say there is always to's and fro’s at the brand level again nothing really material, but in terms of directionally Nexium was probably slightly flattered by differences in the inventory movements between this quarter and a quarter year ago and Seroquel is probably penalized a bit, but that’s the only directional brand issues. I didn’t point out,

Peter Verdult – Morgan Stanley

Yeah.

Ed Seage

But nothing of a real dollar value that we think it would really worry about.

Simon Lowth

Yeah, so Peter, I hope that that helps you in that one.

Peter Verdult – Morgan Stanley

Thanks

Simon Lowth

Let me move to Sachin at Bank of America. Sachin over to you.

Sachin Jain – Bank of America Merrill Lynch

(inaudible) relates to U.S. managed care access versus Lilly. First just a follow Onglyza, how do we think about net points from here, given your comments that you intend to compete vigorously. Secondly, on Brilinta, Lilly in their release yesterday mentioned lower effective selling prices for Effient. Are you seeing any impact on Brilinta pricing or formulary positioning that we should be aware of and secondly, just to clarify a comment on Bydureon, where you refer to new-to-brand volumes being up 15%. Does that include or exclude Byetta switches any comments on the total franchise? And then finally, on Brilinta, on slide 9, where you point to an inflection in U.S. trends and any comments really feel that is enough to get to consensus sales are roughly $300 million this year and $500 million in next year? Thank you.

Simon Lowth

Well, thanks very much indeed so let me pick up briefly on Brilinta, if you might want to pick up the Onglyza one on in terms of it sort of pricing in just check in of it on Brilinta we’ve seen good progress in terms of extending our managed care access with Brilinta. And that has come on the back of, I think, an increasing recognition of the progress we are making and getting the brand onto protocols onto formulary the continued study growth in prescriptions and that’s enabling us to expand managed care coverage for the brand and approved and that’s coming with consistent pricing that we’re not seeing back growth in managed care access coming at the expense of pricing. Onglyza are there any particular comment form the net pricing there?

Ed Seage

Well, certainly wouldn’t make any forward-looking statements bout our pricing strategy but I can tell you that price was net positive in the quarter.

Sachin Jain – Bank of America Merrill Lynch

Yeah. Thanks,

Simon Lowth

And so the investments that it’s going to be focused Sachin, on ensuring that we've got the right level of sales and marketing investment behind the brand, clarity of message, clarity of positioning. Those are the levers that will be pulling. And then of course on Onglyza we've got the SAVOR study also to look forward to, as we discussed earlier. In terms of the identified franchise it’s new-to-brand volumes for Bydureon I mentioned there are 15% and growth one half share points in MBRX and of course, to a fair chunk of that is coming at the, well, Byetta at the same time has been losing ground. And overall, though the net exenatide franchise has grown year-on-year in total prescription terms, I think from memory, about 10% and again, the focus looking forward is to sustain that. We continue to put a significant effort behind Bydureon, as we think that the weekly dosing has a genuine point of differentiation. But we think there is more we can do with Bydureon so the alliance is going to put renewed focus on Byetta to ensure it’s unique positioning as the once-daily is also appreciated by physicians, so and we made pretty good growth in the number of prescribers for the franchise as well, but clearly more work to do as we go through the rest of the year.

And then finally you had question I think on slide 9 around the Brilinta trajectory and I got just, I think Sachin, reframed the comments that we made at our Investor Day which is as we now built preliminary access I think about 62% on our target hospitals, protocol up to almost 50, we’ve expanded managed care access, we think that it’s now the right time to further step up our promotional and scientific investments and laid out probably for about a 50% increase, but when we laid out many of the levers a few weeks ago and you’ll recall those more investment in the field more investments in the medical programs getting those practitioners out there and we continue to think that to the set change in terms of the acceleration of share while we are seeing some of that in the quarter we’re really looking to the back end of the year to see those investments which are ramping up in this quarter to start to payoff. So let’s come back to that I think in the for end of third quarter, fourth quarter. So, Sachin, thanks for the questions. We got Matthew Weston from Credit Suisse also waiting on the line. Matthew over to you.

Matthew Weston – Credit Suisse

Thank you, very much. And three questions if I can, the first on bringing the phase four restructuring timing forward. Could you explain your reasoning for doing that, given that you only ran us through it in detail a couple of weeks ago, at the New York event? Is that because a number of headwinds accelerated? Or, fundamentally, why are you bringing that forward? Secondly, with respect to Pulmicort Respules generics in the U.S. can you just tell us whether or not generics were actually able to ship in the 24-hour period between the verdict and your injunction whether we will actually see a financial impact in 2Q or whether or not you were able to get your injunction in place, before any generic products was shipped? And the finally on net financials, the $93 million that was booked in Q1, you mention FX gains but you don’t break them out, is $93 million a good run rate for us to take for a quarterly for the rest of the year, or should we assume some difference is going forward.

Simon Lowth

Okay, Matthew thanks for the question, firstly on the restructuring as you recall when we laid out the phase four restructuring program, we indicated that it comprised really four elements, the first element and if you take the 5,000 positions, the first element is about a 1000, where positions associated with the final stages of phase three, but we brought an interface for just so that we have one program that we could communicate against. And Matthew some of those, those actions were the underway, so it was an really an acceleration, it was just that, we are already in train.

The second aspect was about [2,500] positions, were against further SG&A savings, reasonably proposition were related to sales force reductions in established markets with loss of exclusivity and I think I mentioned actually in on the Investor Day, that in markets like Germany and France, we have already initiated some of those actions. So not really an acceleration, just a program moving at Phase. And then the third area was the R&D footprint changes and that is the slightly longer-burn program that takes place over the course of the next two to three years.

So that’s running very much to our schedule. So the scale of the charge taken this quarter reflects the residual in the phase three program, plus the sales and SG&A changes that were underway. And then also where we have got known changes with identified movement, we will take a provision against where there is very clear and known changes and where we have announced them, we will take the provisions, so that would be a provision taken which won’t translate into cash for sometime. So those are the factors which meant that a half of the 1.3 and (inaudible) expect for this year, being taken in the first quarter.

In terms of your second question, which was the Pulmicort injunction TRO we can place. I think we are not aware of generics being shift into channels, and that being said, if that has been, it would have been that low volumes, so we haven’t seen a discernible impact. But clearly it's a space that we'll need to watch over the course of the next few weeks. Your final question, I think was the net financing, cost which you had indicated was running, I think instead of 93, and you are asking for whether that was likely to be, a sort of rate for the reminder of the year, it’s a reasonable guide the movement in FX gains is a pretty small part of the total. I mean I think its in high single digits from memory, so I will expect you will see that the first quarter is being a reasonable guide for the full year. And with that move to, sorry so Matthew hopefully, we dealt with your question. Now move to Steve Scala, Cowen, Steve?

Steve M. Scala – Cowen & Co. LLC

Well, thank you. Would you give us a rough sense of how the economics to AstraZeneca of a unit of generic Crestor sold by Watson will compare to a unit sold by AstraZeneca when it launches in 2016, given your very sizeable 39% fee. And then secondly, should we expect emerging market growth to continue at a similar rate in 2013 as we saw in the first quarter of the year? Thank you very much.

Simon Lowth

Thanks. So, let me deal with the emerging market growth. So, we saw good growth in the first quarter, 9% or so. As I mentioned in my remarks a lot of that growth was driven by China where we saw strong growth at 21% and we’re now, our business in China is now back growing, faster than the since in the market. I also mentioned that while we seen some growth in the first quarter from one or two markets, such as Saudi, we'd, there is a growth there is lot of it, when you do your arithmetic you’ll see came net from China.

But as we look forward for the remainder of the year we expect to see continued strong growth in China. And we’d expect to see a slightly more diverse contribution although, a contribution from a broader set of market. So, we feel pretty good about the emerging market prospects for the full year and expect to see a broader contribution.

As you know we guided to high single-digit growth in emerging markets and that’s where we are in the first quarter and that sort of reminds our outlook. So, your second, your first question which was around Crestor and the settlement with Watson which permits them to enter the market earlier than the expiration date.

And of course we get a royalty from Watson as we disclosed, I’m not able to work through the math for you, because it depends on Watson’s price and I’m not going to speculate on that at this stage, but I think you can make an assumption on that from the rest of the pieces are there for you in terms of calculating what that would look like, but the royalty is clearly an important net back for us. Steve, thanks for those questions. Brian, I’m over to you at Barclays.

Brian Bourdot – Barclays Capital

Thanks very much, it’s Brian Bourdot from Barclays. It sounds like the two-question rule has gone, so I have four please. And first question on Onglyza, second on the Naloxegol, third on Symbicort and fourthly on the geographic definition changes. Firstly on Onglyza just wondering if you can give us the new-to-brand share that you captured in the first quarter, please.

Second question on the Naloxegol, I see you still in talks with the FDA, I was just wondering if there is any update on the petition for scheduling that you submitted to DEA. Thirdly, on Symbicort, I was wondering if you could update us on the status of any generics being sold in any markets and your expectations for generic entry in Europe and the U.S.

And lastly thank you very much for the 14 pages of the restatements on geographic sales. I was just wondering does that reflect changes to the way that you operate as well or is this just simply an accounting thing. Thank you very much (inaudible) soon.

Simon Lowth

Thank you very much for that, given your last comment I won't chastise you for the fact you promised you’d only give two questions. So, in terms of the, dealing with your final question the geographic change we have moved essentially what we used to frame as emerging Europe and grouped that into Europe. And that reflects a couple of things. Firstly, in the way that those markets have evolved over the last few years, they increasingly represent, or they increasingly resemble and have characteristics of some of the other European markets, rather than the emerging markets such as the China's and the Middle East and the Latin America’s of this world. So, the nature of competition, the nature of demand and their prospects start to look more like the Western European markets. And secondly, as I think you will recall from our Investor Day and, indeed, before we now have one senior commercial leader responsible for the European region looking after both western and the former Eastern Europe that’s Ruud Dobber.

So that's there's a couple of reasons and we hope that will be helpful for you in laying out the restatement historically so you can track it going forward. Coming back to naloxegol, the discussions, I mean, with the FDA are ongoing and I am not able to update you on the status of the DA on the controlled substance component.

Typically, that follows decisions from the FDA, so I wouldn't have expected enough to be able to give you an update at this time we'll keep you posted on that. In terms of Symbicort, we have not seen any new generic analogue activity in Europe or indeed in the U.S. as you know, we have patent protection on our devices running in out to 18, 19 and we know that there are some generic analogues that have sought approval, but we haven't had any new developments on that score in the last quarter.

And indeed sorry, in the U.S. device I should have may have misled you there. I think the U.S. devices from memory, Karl, 20, 25, 26, so Europe 18, 19 and then U.S. 25, 26. So, we no update in terms of developments in approval and, certainly, not market entry of analogues, and we continue that to see those as markets well protected. You had another question on sorry, on Onglyza new-to-brand share. Ed, do you have that available?

Ed Seage

Yeah, that was a precise number. It's a kind of table. I'm actually just rolling running a ruler across to an axis on a graph and it’s broadly, if you look at Komboglyze and Onglyza together our new to brand share is running around 16% give or take.

Brian Bourdot – Barclays Capital

Okay. Thanks Ed.

Ed Seage

Thank you

Simon Lowth

So Brian thanks for your questions. I'll move to Mattias Haggblom in Danske. Mattias over to you.

Mattias Häggblom – Danske Bank

Thanks. Mattias Häggblom from Danske Bank markets. I’d be interested to hear what you have seen in terms of the price component and developed Europe during the start of 2013, and how it compares with the same period last year is it same, worse, or is it do you think.

And secondly, in light of the strong gross margin for the quarter, historically you guided for gross margins in excess of 80%, but in conjunction with the Capital Markets Day in New York when you reconfirmed your previous, pre-R&D margin range you did no longer explicitly say anything about future gross margins.

So was there some thought behind that as you moved towards specialty care and large brands continue to lose exclusivity, or and 80% is no longer term, no longer realistic? Or is the previous guidance of excess of 80% on gross margin still a valid comment for the longer term?

Simon Lowth

Well. Thanks very much for the two questions. So, firstly, in terms of European pricing action what we have seen and anticipate for this year is very consistent really with what we saw last year and you remember that such historically we had seen government price interventions in the low to mid single digits in Europe and we’ve guided we have the last 18 months or so that we’ve seen that rising up to comfortably mid single digits.

So rather than being in the 3% to 5% range more saw it in the by 6% range and that’s pretty much what we have seen and expect to see this year, so not a change relative last year and a continuing level, somewhat above historic levels reflecting the difficult economic circumstances in many of those markets.

On the question around margins, we’ve guided to a core pre-R&D margin in the 48% to 52% range, as our business developed over the next years and moves more towards a higher proportion of specialty care there will be some movement between movement between price margin and SG&A, so I’m not going to guide beyond this year in terms of how those two different components will stack up. What we've guided to is the pre-R&D margin level, which is the level to which will be managing. So, thanks for your two questions. We have got another one from Nicolas Guyon with Exane.

Nicolas Guyon – Exane BNP

Yes, good afternoon, thanks for taking my questions, actually I have two. The first one relates to the diabetes unit. So what do you expect from the increased FDA scrutiny regarding (inaudible). And the second one is a follow-up on DPP4 again. So we've seen that recent scripts slowed down recently for the entire class. So you mentioned formulary changes for Onglyza specifically, but do you have any idea, any sense as to why the entire class is down? Second question last one is a pipeline question regarding naloxegol. The recent (inaudible) just released at the DDW, showed an efficiency of 10% to 15% placebo adjusted. That is at the very low end of what competitors have achieved are you comfortable with the data? Thank you.

Simon Lowth

So thanks for the questions. So just let me deal with the DPP4 class first of all, and we had seen some reduction in the class growth. And it’s still a fast growing market. I think from recollection, the class TRx growth was around about a 11% I think in the first quarter. But that does compare to the 26% in the prior period and we think that’s due to a couple of factors, we have seen additional TZD generics, in the second half of 2012. So the TZD market decline or stabilized and that slowdown that as a source of growth for DPP4. It's also fair to say that we’ve seen continued strong growth in GLP-1 class and that’s also taken some edge out of the DPP4 market rate of growth. And so those are probably the two main drivers. And so we continue to think it’s going to it remain a growing attracted market, perhaps not at the same rate we had seen.

And I think in terms of the first question, I think this related to the recent review for the DPP4 and GLP-1 class and I don’t Karl, if you’ve give any comment to add on that. Pick that one up and then I’ll come back to the naloxegol question.

Karl Hård

No, we are continuing to work with the FDA and the EMA in this area I mean there are no new findings here I mean the labels in this class have already contained, if you refer to the pancreatitis issue, that's a known effect, and FDA has just said they are looking into reason I know and we will continue to provide all the information there. It’s nothing specific of course to our products for all the other classes.

Simon Lowth

Yeah, so new news on that it’s a known issue, we don’t see any new information, but we will wait to see how that review unfolds. Ed, question on naloxegol, I think in particular the views on the results from the various Codiac programs. Clearly, I guess it’s too early to call and we are in discussions with the FDA on that. And prejudge the outcome of regulatory discussions, but anything Ed you want to add on the specific number I guess.

Ed Seage

Yeah, the question was looking at the response rates of comparing them cross trial to other competitors and I think I have been done an exhaust of a side by side analysis, but my understanding if this category one have to be pretty cautious about making cross trial comparisons because you got different durations of therapy in a lot of these trials and most importantly you’ve different primary end point definitions and lot of them. So it’s hard to make cross trial comparisons that one might be facile with making a blood pressure trial comparison where blood pressure lowering is blood pressure lowering.

Simon Lowth

No I think (Inaudible) that is the key point that are very difficult in this to make those the cross-trial comparisons.

Now, it’s one minute past one and we have our annual general meeting today, which I’m expected to attend and we’ve got a couple more questions here. So, what I’d probably like them in Seamus, if you each of you Seamus that Larry’s going to mark I’ve got (Inaudible) each got one question we’ll try and handle that and then close up, but I’ll need to move very swiftly to your questions if you got more I’m sure you can come back James and the IR team and they'll pick them up for. So Seamus any, one question if you got one I’ll try and deal with it on the call?

Ed Seage

Sure, perfect. Thanks so much for taking the question, maybe just quickly you mentioned the SAVOR study multiple times and I know I’m not asking for kind of the scientific views on SAVOR, but really in the market research that you’ve done around SAVOR what are the key questions that SAVOR will answer to really drive or that can drive improved DPP-4 class growth or specifically growth of Onglyza Komboglyze. Thanks.

Mattias Häggblom – Danske Bank

Thanks. Well thanks for that and I believe we are not in a position to sort of pre-judge the outcome of say this is a cardiovascular study and I mean in essentially set up for no harm effects, but James you want to pick up on any sort of what we’ve done around potential outcomes?

Ed Seage

Yeah, I think first and foremost Seamus it’s addressing the, I mean the previous question in terms of safety designs and non-inferiority, it can remove a number of the questions which is still asking around the, being asked for the moment, so that will be a tick hopefully for the class a whole. And I think that can contribute the class growth. Secondly, clearly the mortality benefit if that is seen that could be a major diver both again class and reaccelerating the growth for the class. And obviously we believe we would be able to benefit in terms of having that data first and [advance] of that data for Onglyza specifically.

Simon Lowth

We’ll probably, to don’t really in a position to pre-judge that. Clearly, something to come…

Mattias Häggblom – Danske Bank

That’s hypothetical, is that data reposted, I mean, those would be the two most important things from a research point.

Simon Lowth

(Inaudible), sorry if you got further questions, if you come to James and James and the team afterwards. And then finally if I can and I’m sorry I know that there is some further people waiting to put questions, Johann and Cristoph, but I’m going to say one last question from Mark, to Deutsche Bank and then with apologies ask if the rest of you could direct your questions to James and the team after the call. Thank you very much indeed. Mark over to you.

Mattias Häggblom – Danske Bank

Thanks Simon, it’s just a quick question about business developments. Pascal said at the investor day that’s this is going to be a focus in upcoming months. So, far we’ve seen what our terms for relatively early to mid-stage R&D deals, is it likely that is what we will continue to see in the coming months. And also how much of that business development strategy is still to be determined by (inaudible) who I know is still not join the company just yet.

Simon Lowth

Okay, well thanks. I mean, I think the broad parameter shape of our business development strategy we laid out in, at our investor day and the first, the focus is on strengthening the science base the pipeline and where we can the on market portfolio for our core, three core therapeutic areas, so cardiovascular, metabolic disease, respiratory and inflammation, and oncology. And that will be, those would be the therapy areas of focus we will continue to look across the discovery development commercialization chain for good opportunities.

And you're absolutely right the four deals that we’ve done in the first part of this year have been earlier stage deals in particularly, actually, in cardiovascular, Oncology, I guess, there is sort of concentration of that activity. As we go forward we will continue to look for good opportunities in those three areas. I think as we all know later stage opportunities on-market opportunities, there are relatively few of them. They tend to be highly priced and therefore we need to be very selective about what we do there. But I do think that we will continue to be good earlier stage opportunities and there is an active at the momentum in terms of reviewing and the discussing potential opportunities as we’ve been for some considerable length of time.

With Mark’s arrival when we joined us, I am very confident that the overall parameters of strategy won’t change, but I’m sure he will be able to bring a lot in terms of even more crisply defining the specific opportunities and priorities within each of the therapeutic areas and he'll be working with his team to do that, but then imagine a significant change in direction, but even more, I am sure momentum and focus behind that activity, which is a key part of our strategy.

Mattias Häggblom – Danske Bank

Thank you.

Simon Lowth

With that thank you to all of you for joining and for your questions. And my apologies are now to two callers who weren’t able to put their questions to us and again I’m sorry for that and I’d urge you to recap James and team to make sure your questions are indeed answered. So, for that thanks to all of you for joining. I mean just a concluding remark really. I think as expected the first quarter results do reflect the continued impact from lots of exclusivity on a number of products, but our outlook for the year is unchanged. We are working to a very clear set of priorities, in particular returning to growth, and achieving scientific leadership, particularly in our core TAs and I think in the quarter we are encouraged to see that all five of our growth platforms contributed incremental growth and as I just touched on in my last Q&A the recent business development activities have reinforced our commitment strengthened our opposition in our core therapy areas and over time will bring distinctive signs to new medicines and hence to the patients we serve. So, with that I bid you all a very good day. Thank you.

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