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AstraZeneca PLC (NYSE:AZN)

Q3 2010 Earnings Conference Call

October 28, 2010 7:00 AM ET

Executives

Jonathan Hunt – IR

Simon Lowth – CFO

Ed Pierson – Global Early Development Project Manager

Analysts

Brian Bourdot – Barclays Capital

Tim Anderson – Sanford C. Bernstein

Simon Johnson (ph) – Morgan Stanley

Gbola Amusa – UBS Investment Bank

Alexandra Hauber – JP Morgan

Gavin Macgregor – Credit Suisse

Kevin Wilson – Citigroup

Justin Smith – MF Global

Mattias Häggblom – Danske Markets

Operator

Good day ladies and gentlemen and welcome to AstraZeneca third quarter and nine months results analyst call. My name is Shannon. I’m your event manager. Throughout the conference your lines will remain on listen-only (Operator Instructions). I’d like to advise all parties this conference is being recorded. And now I’d like to hand over to Jonathan Hunt. Thank you, Jonathan.

Jonathan Hunt

Thank you Shannon, and good afternoon and welcome ladies and gentlemen to AstraZeneca’s third quarter conference call. Leading today’s call is Simon Lowth, CFO of AstraZeneca. Also on the call are members of the finance and investor relations team. But as usual before I hand over to Simon, I’d like to read the Safe Harbor statement.

The company intends to use the Safe Harbor provisions of the United States Private Security Litigation Reform Act of 1995. Participants on this call may make forward-looking statements with respect to the operation and financial performance of AstraZeneca. By their very nature, forward-looking statements involve risk and uncertainties, and results may differ materially from those expressed or implied by these forward-looking statements. The company undertakes no obligation to update forward-looking statements. With that now I’ll turn over to Simon.

Simon Lowth

Well thank you Jonathan and good afternoon to everyone. On today’s call, I’m going to focus on five topics. First, the headline numbers for the third quarter and the nine months. Then, I’ll cover the third quarter revenue performance by region and by our key brands. Third, I’ll turn to the third quarter core operating performance, with an emphasis on the key drivers of operating profit and margin. I’ll briefly touch on cash performance and our steadily improving net cash position. And finally, I’ll close with our thoughts on guidance for the full year.

So onto the headlines. As you will have seen in this morning’s release, we remain firmly on track to achieve our full year financial targets. With good execution in the market, and cash generation in the quarter. Although the revenue headwinds we have been expecting on are visible in the third quarter results. Total company review was $7.9 billion in the quarter, that’s a 2% decline in constant currency terms. CRESTOR, Symbicort, Seroquel XR all posted strong double-digit sales growth in the quarter.

On a regional basis, we had good performance in the emerging markets were revenue increased by 14% on a constant currency basis. Despite the government price interventions in Western Europe, revenue there was up 3%. And established rest of the world markets, revenue was up 5% in the quarter on a good performance in Canada, which was driven by CRESTOR. Overall revenue in the markets outside the US increased by 7% in constant currency terms.

As expected generics competition in the absence of H1N1 pandemic flu vaccine revenues lets a challenging quarter in the US, where revenue was down 13%. Generic competition for Arimidex, Pulmicort Respules and Toprol XL reduced third quarter revenue by nearly $0.5 billion in aggregate, and a negative variance on flu vaccine cost of another $152 million.

Turning to the core operating profit for the quarter. The impact of the lower revenues on core operating profit was been mitigated by operating efficiencies and high other income So the key driver of the 10% decline in core operating profit was the negative impact on growth margin from an intangible asset impairment charged because of sales this quarter and this is set against the core gross margin in the third quarter of 2009, which benefited from the release of a provision related to the resolution of a third-party supply contract issue. So taken together its cost of impairment and lastly its provision released accounts for $285 million swing in core gross profit.

Core earnings per share in the quarter were $1.50 compared with a $1.68 last year. This is a 10% decrease with constant currency in line with the core operating profit trend. Now making the bridge from core EPS to reported EPS in the quarter. We have the usual adjustment times. Restructuring costs which were somewhat higher than the third quarter last year and then MedImmune and Merck related amortization, which are broadly stable year-on-year. Legal provisions are the biggest swing factor in the core adjusting items compared to a $180 million in Q3 2009, legal provisions totaling $478 million have been charged in the third quarter of 2010, of which $473 million relate to the ongoing product liability litigation with Seroquel.

Of the $473 million, $203 million relate to the agreement in principle that have already been reached to-date to resolve more than 18,250 claims. The balance of $270 million is an additional reserve which is the aggregate of two components. First, estimates for settlements costs of remaining US claims that have not yet been resolved and are still subject to mediation and second the anticipated future defense costs associated with resolving or all essentially all to such remaining plans. And the detail is included in note five in our third quarter financial statements.

Net of these adjusting factors, reported EPS was $1.08 compared with a $1.46 in the third quarter last year, so a 26% decrease. So that’s the third quarter headlines. I’m not going to dwell on the nine month figures. In brief revenue increased by 2% at constant currency, core operating profit was unchanged and core EPS was up 7%.

I’ll now turn to our third quarter product highlights starting with CRESTOR. And for the avoidance of doubt, when I refer to revenue growth rate, it is on a constant currency basis. So CRESTOR revenue was up 20% in the quarter, to nearly $1.4 billion. CRESTOR’s volume growth continues to significantly outpace the statin market in all regions of the world. Revenue in the US was up 20% to $626 million. CRESTOR total prescriptions increased by 12%, that’s 5 times the statin market. CRESTOR’s share of total prescriptions in the US continued to increase reaching 12% in September, and dynamic share, so that’s the share of new starts and switches that remains north of 15%.

CRESTOR revenue in the rest of world was up 20%, sorry, 21% to $748 million. Having good growth in Western Europe, and particularly in France and Italy as well as a good loan cap take in Spain. In the established rest of world, the Canada, Australia, Japan, all had strong performances. Sales in emerging markets increased by 23%. So turning to the Seroquel franchise, third quarter sales were up 7% to $1.3 billion. Growth was fueled by Seroquel XR which was up 50% in the quarter, while sales in the Seroquel IR were up just 1%. In the US, Seroquel sales were up 10% to $936 million.

Total prescriptions for the Seroquel franchise increased by 60 basis points in the quarter and market share was down just a big by around 17 basis points since June. Seroquel XL sales were up 66% in the quarter and has grown in 17% of franchise revenue and 15% of franchise prescription in the US. Seroquel XL sales in the rest of world were up 45% in the quarter and now accounts for a third of franchise sales outside the US. So Seroquel franchise sales in the established rest of world were down 4%, largely reflecting phasing differences in the timing of shipments through our marketing partner in Japan. This was partially offset by some growth in Canada now that generic erosion on Seroquel IR has stabilized following the loss of exclusivity in 2008.

Franchise sales were up 10% in emerging markets, sales in Western Europe were unchanged. Symbicort had another good quarter with sales up 19%. Sales in the US were up 40% to a $175 million. Symbicort prescriptions were also up 40% compared to a 4% increase for the fixed combination market. In US Symbicort share of new prescriptions of fixed combination products increased to 19.3% in September. That is up another 40 basis points during the quarter. And market share of patients new to fixed combination therapy is 26%.

Symbicort sales in the rest of world were 13% ahead of last year. Sales in Western Europe up 4%, sales in established rest of world were up 56% reflecting the launch in Japan, where volume growth – volume share is now over 20% and new patient share is north of 30%. Sales in emerging markets were up 26%. Globally, Nexium sales in the third quarter were up 2% with sales of just over $1.2 billion.

Sales in the US were down 1% to $682 million. Dispensed retail tablet volume declined by around 4%, although we continue to do an excellent job of holding share. Nexium market share of dispensed units is down only 30 basis points in September 2010 compared with December 2009. Average realized prices were up 4% in the third quarter last just about flat year-to-date and I think they’ll probably be flat or slightly down on the full year.

Sales in Western Europe were up 1%, one of upsides in revenue performance this year has been with slow entry of generic in Europe for exclusivity in the so called 10 year markets expired in March. And this is very reminiscent of Toprol in that assumptions on the timing of generic entry are uncertain. During the quarter, we saw our generic approval in the UK, but no launches yet and with litigation ongoing. There have been several launches in Germany and we initiated legal action there on the 15th of October. There is also been in Spain where legal action continues.

So as in emerging markets, the Nexium were up 16% including 47% growth in China, and 19% increase in Canada fueled by a 5% in Greece and established rest of world. Sales of Arimidex were down 38% in the third quarter to $284 million. Of course, the launch in generics in US is the reason. Sales in the US were down 80% to $43 million following the generic approvals in June.

Arimidex sales in other markets were down 4% in the quarter, it have been granted the extensions for the supplementary protection certificates in 12 member states in the EU including France, Italy, the UK and Germany and this is extended market exclusivity until February 2011. ONGLYZA revenue was $19 million in the third quarter of which $16 million was in the US. ONGLYZA share or its total prescriptions in the US DPP-4 market reached 9.1% in the latest weekly data and share of patients newly starting DPP-4 treatment is 24.5%.

I’ll now turn to the third quarter P&L. 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. As with sales, when I refer to growth rates, they will all be on a constant currency basis.

Core gross margin was 80.9% of sales for the quarter and that compares with 84.9% of sales in the third quarter of 2009. As I mentioned at the start of my presentation, last year’s gross margin benefited by a provision relief, whereas this quarter we have an intangible asset impairment charge, a net $285 million swing year-on-year. The impairment is related to the decision to discontinue further development of AZD3355. This is one of the assets involved in the Merck exit arrangement. When an intangible it’s related to release from future contingent payments, as it is in this case, we do not exclude the impairments from core earnings.

Gross margin for the nine months was 81.7% of revenue and I expect the full year will be around this level. Core SG&A expense was down 1% compared with the third quarter last year. We continue to invest to grow our emerging markets business as well as the new product launches. And then these were more than offset by operational efficiencies across the established markets. As for phasing, I point out that the fourth quarter is often the highest core SG&A spend in the year with last year’s fourth quarter coming in at just over 34% of sales. While the fourth quarter 2010 in likely to below last year in dollar terms, I’d anticipate the same sort of seasonal pattern compared to the previous three quarters.

Core other income was $79 million higher than the third quarter last year, including royalty income on the Teva generic for Pulmicort Respules. I still expect core other income to get just under last year’s level which you’ll recall with $926 million. So that leads to a core pre R&D operating margin of 53.4% of revenue, that is down 370 basis points in the quarter, chiefly on the gross margin variance.

Core R&D expenditures were 5% lower compared with the third quarter last year, but as expected a bitter head of the run rate seen in the first half. We continue to increase our investment in biologics. Project spend is still lower than last year across with small molecule portfolio. And although we are starting to see some ramp-up with the Phase III start for the antidepressant TC-5214 and Fostamatinib for Arthritis. So far this year, we have also seen lower intangible impairments go through the R&D line than in the recent past, but that is always dependent on data milestones, so it’s a hard one to forecast.

So core operating profit is down 10% in the quarter in constant currency terms. Core operating margins for quarter was 40.9% of revenue down 340 basis points with the growth margin movements largely driving the variance. Turning to our productivity program, we have taken restructuring charges of $212 million in the third quarter, bringing the year-to-date total to $770 million.

Covered in the press release, the program is on track for both costs incurred and the benefits being realized. Let me now turn to cash flow. Net cash from operating activities for the nine months was around $0.5 billion lower than last year. This is largely driven by the legal settlement payments related to Seroquel’s sales and marketing practices and the AWP litigation in the US which more than offset a good underlying cash performance. Net cash distribution to shareholders for the nine months increased to nearly $4.7 billion, through dividend payments of $3.4 billion and net share repurchases of $1.3 billion.

We are still targeting $2 billion in net share repurchases for the full year. Overall, our net cash position improved during the quarter, and is now $1.3 billion as of the 30th of September. Finally, turning to guidance. We turned in a good performance year-to-date with revenue and core earnings ahead of last year. We’re driving good revenue growth on the brands that retain exclusivity such as CRESTOR, Symbicort, and Seroquel XR. Our business outside the US has done well filled by mid-teens growth in emerging markets. And we continue to advance our productivity agenda across all parts of the organization.

Starting in Q3 the headwinds that we had expected are now upon us and demanding revenue in core EPS comparisons will carry into the fourth quarter as well. Nevertheless based on the year-to-date performance and the outlook for the remainder of the year, revenue for the full year is now likely be broadly unchanged in constant currency terms compared with the full year for 2009. The core earnings per share with one quarter to go, we’ve narrowed the range by increasing the lower end. The target for core EPS is now between $6.50 to $6.65 compared with the previous guidance of $6.35 to $6.65.

Again guidance is based on January 2010 average rates to our principal currencies compared with the guidance rates, actual rates for the nine month year-to-date, our result is in adverse variance of around $0.08 in core EPS. Of course, we’re no view of a future movements of currency for going forward this guidance takes no account of the likelihood that average exchange rates for the remainder of the year may differ materially from the January 2010 average.

As usual I point you to our currency sensitivity chart to help you flex your own estimates on the currency impact for sales and earnings. I wrap up my formal remarks here and turn the call back to the conference operator to begin the question and answer session.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, your question and answer session will now begin. (Operator Instructions) And our first question comes from the line of Brian Bourdot of Barclays Capital. Thank you, go ahead.

Brian Bourdot – Barclays Capital

Thanks very much, good afternoon. It’s Brian Bourdot from Barclays Capital. A few questions please, firstly on CRESTOR, could you give us some color as to the mix of your new patients in the US particularly, with regard to how many of them quality under the JUPITER criterion? Secondly emerging markets; we’ve seen your constant currency growth rate of sales in emerging markets go from 19% growth in Q1, 16% in Q2, 14% in Q3. I guess, it’s tempting to extrapolate that and suggest there is a slowdown there, or would you perhaps – would we expect to see significant volatility in this growth rate going forwards bearing in mind emerging markets are growing at around 14% to 15%, and whether you can grow above that rate. And lastly Seroquel, you’ve taken additional legal provisions there, is this now a reasonable expectation for your Seroquel product liability exposure or could we expect to see further charges here? Thanks very much.

Simon Lowth

Okay Brain, thanks for those three questions. Let me address the emerging markets question, I’ll ask Ed to talk about the CRESTOR in the US, and I’ll come back and talk about the Seroquel product liability question. So in new emerging markets, we continue to see a strong double-digit growth in our emerging markets business. And that’s very much in line with the myth sort of planning assumptions that we stress out. We do see across the portfolio some variability in growth rates from quarter-to-quarter as a function of particular dynamic in particular market. But I wouldn’t draw any particular trends from the movements in the three quarters that we’ve had during the quarter of this year Brian. We’re very much on track with our plans in the markets, please with the progress that we’re making in the performance of delivering and continue to see this as an important opportunity for strong long-term growth for the company as we go forward.

Ed, CRESTOR in the US, the question was really whether we both can give any more granularity around mix of patients for them to like to offer any thoughts.

Ed Pierson

Yes, I mean I think it’s fair to say that CRESTOR’s performance in the market has been driven by its very strong positioning in the patients who have multiple risk factors and the higher risk cardiovascular patients. But we can only tie that to actual new therapy initiations by inference from qualitative research about we’re in position to say they position a drug, we really don’t have any line of sight and the granularity of which of those patients would meet the JUPITER criteria, rather than what patients would be considered higher risk by their – either previous MI or they are indeed LDL levels. So unfortunately can’t get that level detail but I think it’s fair to say that CRESTOR’s position for the stacking best suited for patients at elevated cardiovascular risk certainly is driving the performance.

Simon Lowth

I think that – thanks Ed for that. And I think the only other comment I would add Brian to that is, I think where we do have a very picture is the fact that the CRESTOR is increasingly viewed very clearly viewed as the first treatment choice for patients that are at risk with multiple factors. And we can see that for example if we look at research we do amongst physicians and ask, what’s the first treatment choice for at risk patients, if you went back a couple of years the response for that would have been, 30% the CRESTOR, 39% for Lipitor, 21% for Simvastatin. Two years on, the 30% for CRESTOR has moved to 54% and the 39% to Lipitor has moved to 24%. So we can see a very clear recognition amongst the physician population that were polled that they understand the role that CRESTOR can play in treatment.

Coming back then to your third question, which was the product liability matter with Seroquel. The – as I described in my remarks, that the nature of the provision we have taken during the quarter to remind you, we at this point in time, we have an inventory of claims made against the company. We continue to see limited merit in those claims and are defending and continue to defend them vigorously. As you know many cases that have been brought before court have not made to a full trial, only one has taken place earlier this year and we were successful. So the processes of litigation continues. Having said that the court asked us and the various plaintiff’s lawyers to participate in a process of mediation.

We’ve entered into that process and participating very constructively within it. We’ve reached agreement in principle to settle with 18,000 or more than 18,250 claims and that’s three of the provision and then we’ve taken an additional reserve which is our best estimate of the settlement costs and future defense costs associated with the remaining cases that we see. So that’s the position today. Clearly, it’s not easy to of course to predict at this point how long it will take to resolve these matters where we have agreements in principle and obviously in the outstanding cases, we’ve made a best estimate of that amount, and it’s also fair to say that that we do see some new cases coming but as you all have seen a few follow this matter in our accounts, it’s a very low number of new cases that have been joining if look at it over the last year or so. So hope that gives you a little bit more understanding of that issue, Brian. So thanks for your question.

Brian Bourdot – Barclays Capital

No, thanks very much for those detailed responses.

Operator

Thank you. And the next question comes from the line of Tim Anderson of Sanford Bernstein. Thank you, go ahead.

Tim Anderson – Sanford C. Bernstein

Hi, I have a question related to CRESTOR, and generic challengers. So specifically, Watson Pharmaceuticals have filed a new drug application for a rosuvastatin zinc formulation which is a different salt formulation. I’d be curious to get your comments on the potential impact of that, my understanding is that that may not happen until 2013, but more importantly I’m hoping you can comment on the Ex-US market situation. So just like Plavix are early surprise generic competition in Europe from different salt formulations, that were deemed equivalent might the same occur in the case of CRESTOR? Thank you.

Simon Lowth

Well Tim, thanks for the question. Dealing first with the situation in the US, as we all recall in June this year the Delaware court decided in our favor on the consolidated ANDA infringement case involving the eight initial filers seeking approval for generic CRESTOR, that was on the calcium salt. We have received a follow-up powerful letter from Watson in September informing of a filing of, it’s a 505 filing for zinc formulation. The letter challenges the substance patent and the formulation patent to CRESTOR we’ve filed suit against Watson for patent infringement and we expect that to initiate a 30 month stay.

Tim, you’re probably aware that seeking approval for different salt forms, you don’t file an ANDA, it’s a similar but for a different application it’s so called paper NDA. It’s a different salt form. It’s considered a different active ingredient. It has to be shown to be bioequivalent being in rated of approved salt form and they’re not, in the US anyway they’re not considered for the therapeutic equivalent. So that’s where we stand with Watson, we filed suite, will commence that process in expected 30 months stay.

If you turn back to Europe, CRESTOR is protected by substance patent in most major European markets that the patent covers the Simvastatin and all sort of pharmaceutically acceptable salts including zinc salts. It’s, I’m not going to speculate on what further action might take place in the Europe at this stage. So thanks Tim for the question.

Operator

Thank you. And our next question comes from the line of Andrew Baum with Morgan Stanley. Thank you, go ahead.

Simon Johnson (ph) – Morgan Stanley

Hi, good morning, it’s Simon Johnson. Perhaps you could talk to the theme of what R&D spend we should be thinking about for the next couple of years because not only as you highlighted, have you recently initiated a glut of what looks like expensive in long clinical trials and I guess, I’m thinking of Pegasus among the two you mentioned but also Astra now has laterally hired senior R&D executives who presumably are going to be arguing for more rather than less money. So, perhaps if you could talk to that and give us some kind of framework, as to what to expect, and maybe also comment whether we’re seeing the impact of the announced plant closures within the P&L already or whether that’s something to be seen in forthcoming quarters?

Simon Lowth

Okay, well Andrew thanks very much indeed for the question. If I talk just about the for the short-term dynamics in the R&D spend, we continued to make good progress in our efforts to restructure and improve the gross productivity within R&D. We announced generic series of major initiatives at the beginning of the year. We’re focusing about disease area, our strategy into those areas. We really felt we could make a difference, a consolidation of our geographic footprint with closure of some sites including two significant sites. And we continue to drive ongoing productivity across our – as indeed across broader AstraZeneca through outsourcing activities, procurement initiatives, and in improvement activities.

All of those efforts are having an impact in improving the cost – the unit cost position in R&D and I think an impact on the cost position you’ve seen during the quarter of this year. The run rate was lower in the first half of the year as a number of late stage trials completed, and we’ve seen it step up a little bit in the third quarter as we got it and see that continuing into fourth quarter, as a series of late stage trials initiate. As we go into ‘011 and beyond, I would expect they’re sort of continuing a dynamics. I’m pleased to say that our new colleagues leading the R&D organization are highly aligned with our overall strategy, are as focused ensuring we deliver valuable new patents for medicines and at the same time generate attractive returns on investment to our shareholders as aligned with that as indeed I am.

And we’ll be managing our cost base accordingly. To give you a sense of the quantum of investments in R&D, I point you Andrew to the mid-term planning assumptions we laid out where we explained our revenue corridor of $28 billion to $34 billion. We explained that we would be delivering free R&D margin in the range of $48 billion to $54 billion. And thirdly and critically in answer to your question that we’d be reinvesting between 40% to 50% of our post-tax pre R&D cash flow back into the business to drive future growth in value. That would cover R&D expense and have the R&D with cover, cash investment in licensing and we also cover capital investment in plants and information technology.

The latter if you look at our accounts, you’ll see it’d been running at sort of $1 billion or so, north of $1 billion, $1.1 billion. That gives you a sense of what over that five year period of sort of level of reinvestment would be, and as you know Andrew I don’t split that between expense – what’s expensed through the P&L and cash investment and licensing to me, it’s all cash and it’s all in investment in generating much into the patients. So in fact thanks for the question.

Operator

Thank you. The next question comes from Gbola Amusa of UBS. Thank you, go ahead, Gbola.

Gbola Amusa – UBS Investment Bank

Hi, thanks for taking my call. A couple of questions on CRESTOR first, and the ATP IV guidelines which after some delays are due for public comment in the spring, and publication in the fall. Just given the JUPITER progress to what extent are these guidelines necessary to more fully capitalize on the entire message? My second question is on Brilinta and the Pegasus-TIMI 54 study. And thinking about Plavix. We can see the used for 250 to 350 days after acute events seems to double ACS sales. And I know the answer is perhaps years away but the question is what multiplier effect would multiyear anti-platelet use have on the potential of anti-platelet drugs?

Simon Lowth

Okay, well thanks for those couple of questions, I mean I think it is too early for us to address your question, I think on – to the different treatment paradigms that we may see for anti-platelet medicines. We’re obviously focused very much at the moment on our launch preparations for Brilinta. We’re looking ahead to the produce the date in December. We’re very pleased with the positive approval in Europe and as we’re even said we’ve initiating the Pegasus study. And it will be part of a comprehensive program to ensure that, that we build on Brilinta and ensure the successful medicine for patients, I can’t really comment much beyond that timeframe. I don’t know, Ed, if you want to pick up the question on the guidelines in CRESTOR? Clearly, it’s an important part of shaping overall use of statins in the US market, any comments to that?

Ed Pierson

Yes, I mean I think we are going to look forward to seeing exactly where those guidelines land in terms of the role of CRP and defining patients who want a treatment. So that certainly those guidelines can support the education of physicians and positions as to what role am I play in diagnosis in initiation treatment. I also wouldn’t ignore the fact that the other component of those guidelines could very well be just setting more demanding goals for on treatment LDL lowering which of course, would also play directly to CRESTOR’s strength. I think there is two aspects of the emerging guidelines that we think could be very useful but again that’s how we actually see their draft never mind what emerges after the comment period of its speculation, but I think there are two components for that ATP guidelines that should play to CRESTOR’s strength.

Gbola Amusa – UBS Investment Bank

Thank you.

Operator

Thank you. And the next question comes from Alexandra Hauber with JP Morgan. Thank you.

Alexandra Hauber – JP Morgan

Yes, good afternoon, three questions please. Firstly, on Nexium, how much of a generic erosion in Europe should we expect, and I do appreciate that is probably difficult to answer given that on France, which is the biggest chunk, you haven’t even got an approval of that – there is not even approval for a generic, but I thought you may have some idea about timelines of when that is coming, and also maybe tell us whether you would expect France to be a fast or a slow erosion country. Secondly, given that we all look a lot closer at cash, how much – on the litigation front how much of the litigation provisions are still sitting on the balance sheet that need to be paid out, and would it be fair to assume that most of that will come out in the next 15 months? And then the final question is on the transfer pricing that you charged to Astellas in Japan for Symbicort and Seroquel. Can you just roughly give us a percentage what that transfer price is of Astellas selling price is?

Simon Lowth

Okay, well thanks for those questions. I deal with the third one because it’s a quickest one to answer. We’re not in a position to give you that information, it’s not something we and our partners disclose.

Alexandra Hauber – JP Morgan

Would it be then assumed that it’s just a 50-50 economic share you have in the product, or is it…

Simon Lowth

I’m not going to provide sort of further information into that arrangement. If I turn to your second question, which was around the cash provision – the litigation provision, you’ll recall that we took a provision in the middle of last year on the AWP, on sales and marketing issues. And you all have seen that that was a provision taken and that cash is now broadly being expended, and that is in fact I call that out as the main driver for the fact that our operating cash flow is lower in this year than last year. So that is a delay – 15 month delay payments on that provisions.

If you look at the provision we had taken this quarter, that is obviously a provision on the balance sheet. Alexandra, it’s difficult to predict the timing of that cash flow and that we have, as I mentioned there in my remarks, at this stage since we reached agreements in principle in a mediation processes, many aspect of that agreements that still need to get work through with the first category of plaintiff lawyers on the 18,250.

And in the remaining claims we’ve taken a provision, that’s amount to which we haven’t reached agreement in principle. It’s unclear exactly how that matter will be resolved, I’m not able at this time to predict of the timing. And on your third question with Nexium in Europe, the position I think is we all know, Nexium in Europe is protected with a variety of patents. In addition to that, it had data exclusivity which expired some time ago in the six year markets but at the end of March in the 10 year markets.

In the resolution of this happens on a country-by-country basis. So the timing really is a function of the generic applications, regulatory approvals and the process of litigation in 10, 15 markets around Europe. The position at the moment is that we as I mentioned, we have had launches in a number of six year markets including Spain, Ireland, Austria, Denmark. We’ve had launches in Germany being the first 10 year market in those cases. We are in a process of vigorous litigation and we will have to see how that situation unfolds. It will be one of the variability’s that we will take into account in January when we share with you our expectations for 2011.

Ed Pierson

And Alex, just to add one of the thing, you are right in highlighting, it’s going to be a challenge for you to track because you don’t have to track it not at a pan European level but almost on a country-by-country basis. France is one of the larger markets as yet, we haven’t seen a generic there. From memory that’s approaching about a third of the revenue in the main European markets.

Simon Lowth

That’s right. It’s the largest single market in Europe. Quite comfortably so.

Ed Pierson

So it’s something to think about, I think, throughout the shape of 2011.

Alexandra Hauber – JP Morgan

Thank you.

Operator

Thank you. And the next question comes from the line of Gavin Macgregor of Credit Suisse. Thank you.

Gavin Macgregor – Credit Suisse

Thanks very much. Just, one question from me on pricing and discounts of some of your key brands in the US. So, if I look at the net realized selling prices for Symbicort, CRESTOR and Nexium, through each of the quarter this year, they’re quite different trends, with Symbicort we’ve seen plus 10% growth in 1Q and 4% to minus 1% or 2% in the third quarter. For CRESTOR we’ve seen stable high digit single – single high digit growth throughout the year, while for Nexium it is going from being price declines now to plus 4% growth in the third quarter, given that each of these drugs is really the list price rises aren’t changing hugely. Can you give a bit more color on what’s driving the apparent differences in the discounts and whether we expect to see it continue going forward? Thanks.

Simon Lowth

Okay, so I mean there are – and that the overall dynamic is obviously shaped by list price increases which were taken a couple of times in ‘09 but only at the beginning of ‘10. So you’ll get a dynamic created by timing during the quarters of ‘10 and we’ve seen that to an extent this year. Secondly, against list there are then a variety of rebates and discounts that are negotiated on a formally by formally basis with our managed care customers and clearly the next between customers in any point in time can have a bearing on that as to movements in terms of stocking. I don’t know Ed, if you’d like to add any comments.

Ed Pierson

I’d like to – that aspect of the volatility as well as you’re always truing up in arrears the rebates that you apply to the managed care and the likes. So a lot of quarterly volatility is that noise within the system.

Simon Lowth

Yes, that certainly.

Ed Pierson

I’ll make a fair point as to say that we are seeing net realized prices gained in CRESTOR and Symbicort, .i.e., we’re not steeply discounting those products to drive the market share that you’re seeing in the marketplace. Nexium from a period of several years where the price declines and realized prices were pretty significant, we’ve now probably reached a period of more steady state. So on the qualitative gateway is probably more indicative than looking at the quarterly phasing.

Simon Lowth

Yes, and that’s just to be absolutely clear on that Gavin, that Ed made a very important point. In accounting for discounts with our customers in the US, we’re essentially accruing and based upon a whole series of algorithm developed over time, but obviously in each period if there is – if that algorithm doesn’t quite get us to exactly the right number, we then make, we then make a changes in the reserve and that can create some volatility on a particular brand in particular quarter. Great point, Ed. Okay, any other questions?

Operator

Thank you. And the next question is from Kevin Wilson of Citi. Go ahead please.

Kevin Wilson – Citigroup

Thanks very much. A question on emerging markets, and investment in emerging markets. Relative to your expectations let’s say a year ago, are you finding that you have to spend more on sales and marketing to support the growth in emerging markets than you thought, or is it the same, and what’s the competitive situation. Is it just free flow of opportunity that the more you spend, the more you get, or do you find that the competition is in some way going to get in the way and you’re going to have to spend more than you thought?

Simon Lowth

Hi Kevin, well thanks for the question, I mean I think that the headline answer to your question is that we are not seeing a significant change in the sales and marketing cost intensity of our business in the emerging market, i.e., we’re finding we’re getting the return on our sales and marketing investment very much in line with our plans and expectations. We look very hard at each quarter when we review our business performance, we look very hard at the dynamics in our main markets, whether we see an opportunity to put more sales and marketing investment behind particular geographies, particular brand and this is a month of best investment, opportunities that we see in our business and where we see a good investment we will invest.

And that’s one of the factors behind the remarks I made in my presentation initially which is you tend to see a bit of a step-up in sales and marketing costs, SG&A in the third and more importantly fourth quarter and that really reflects that dynamic. I think sort of stepping beneath that, we do obviously look at the competitor’s situation. And we need to make certain that our message is being heard loudly by physician, players in our key markets. And that can require us to approach additional sales and marketing investment behind brands in the market and but that’s very much in line with our expectations. I would also say though that we’re beginning to look very hard at bringing into our emerging markets. The different sales and marketing approaches which we’ve been introducing in North America and Europe, and you’ve probably heard about these, the custom services that have assistance, the inside sales effort, the digital presence.

All of these are starting to look at their applicability in our emerging markets is the way of both reaching more customers faster and also more efficiently. And I think that will increasingly it’d be a dynamic as we go forward. So thank for the question.

Kevin Wilson – Citigroup

Thanks.

Operator

Thank you. And the next question is from Keyur Parekh of Goldman Sachs. Thank you. Keyur, is your line on mute? Keyur Parekh we’ve realized your line this end, if you would like to go ahead and still ask questions (ph)? Okay, I think we maybe go to the next question. The next question is from Justin Smith.

Justin Smith – MF Global

The first is on in-licensing, since the Arthritis product in the first quarter, we’ve seem to seen a bit of a slowdown in in-licensing deals. Just wondered if you could, share a few thoughts on what’s driving that, and how we should think about that activity going forward, and then the second question is just on Symbicort. I would be very interested sort of hear your thoughts on how you’re thinking about how that franchise may develop going forward if we do start to see once daily competition there? Thank you.

Simon Lowth

Thanks for that in-license, I don’t know if, Jonathan, you want to pick up on Symbicort franchise.

Jonathan Hunt

No I think in-licensing Justin, it’s a very important part of our strategy. We are seeking to create as much flexibility on our in-house R&D cost base, so that we can genuinely look at in-house opportunities to take into late stage development equally alongside in-licensed opportunities and look at that in a balanced diagnostic way. So it remains a core part of our strategy. We have a very active business development team working with various therapy area teams, looking at opportunities. They’re very active, we’re involved in a number of situations and discussions. We just haven’t seen one coming fruition in this period. But if you look back we did set some pretty rapid succession, but actually haven’t done any sort of significant deals for the prior, sort of nine months or so before that, it’s a reasonably typical pattern, I wouldn’t draw anything more from its core part of what we do we’ll continue to look to bring in good opportunities. Simon, do you want to touch on Symbicort, the dynamics as we move.

Simon Lowth

Yes, Justin I don’t, I have to focus with you on the performance now and continuation of that we’re pretty pleased with performance of Symbicort. If you look in the quarter plus 19% growth. Good progress in the year. Actually up to 26% new to combination share in that market. You’re seeing a similar sort of pattern of accelerating growth in the emerging market as well. So pretty good performance. I wouldn’t want to try and do a compare and contrast with the once a day new entrant because we haven’t seen the day (inaudible). It’s not there marketplace yet.

Justin Smith – MF Global

Thank you.

Operator

Thank you. So your next question comes from the line of Mattias Häggblom from Danske Markets. Thank you.

Mattias Häggblom – Danske Markets

Thanks for taking my question, two questions please. Simon, the fact that you’re raising full year guidance – sales guidance to flat sales in local currencies but only tightening your core EPS range. What does that tell us of the quality of the earnings? Is there – does it imply some underlying margin contraction or why are you not raising the full core EPS range as well? And then secondly, with the possible approval of Brilinta in December will that be enough to revisit your mid-term guidance in connection with the full year report in January, as I would assume that it’s a critical element of your $4 billion to $6 billion of sales, 2014 coming from pipeline and in-licensing, or would that still be premature to do already in 2014? Thank you.

Simon Lowth

Yes, I mean I think to your second question, I mean we will review and update you on mid-term planning assumptions in January, including the contributions from our pipelines, of which you’re right Brilinta was always a significant component of that. I don’t think, not got really any further information’s relative to that which we have when we set out the mid-term planning assumptions. We’re obviously pleased with positive view in Europe and look forward, as I said earlier to the December PDUFA date for Brilinta.

In terms of our guidance for this year, we do see little bit more on the first line hence our view now is likely to be unchanged versus low single-digit. On the other hands, we’ve taken an impairment in the quarter. And as I also mentioned in my remarks, we are seeing good opportunities for investments to drive growth in some of our emerging market, and indeed actually in a couple of established markets. And as I guided in my remarks, now we expect the fourth quarter to be quite a busy periods of sales and marketing investment. It was last year as well, similar pattern probably. And so bringing all that together we see our outlook for the year unchanged at the top end and obviously we have just a quarter to go, greater confidence and we pulled out the lower end.

Mattias Häggblom – Danske Markets

Okay, thank you.

Simon Lowth

Thanks a lot. I think we’re probably reaching the end of the call. I know that all of you have got a busy day. I think there is about 40 companies, isn’t that right, reporting in Europe today. So I know all you have got to a busy day. Let me draw the call to a close. And thank you for joining us on the call today. We continue to drive our performance, especially on our key brands where we got exclusivity and if I mentioned a few times in the emerging markets. We’re making excellent progress on our productivity agenda, reshaping the cost base, strive the future competitiveness of AstraZeneca. Cash generation as you can see is strong, and its funding both our investment in future growth and value, and also providing strong cash returns for our shareholders. And finally, we remain firmly on track to achieve our financial targets for the full year. So with that, thanks very much indeed.

Operator

Thank you. Thank you ladies and gentlemen. That concludes your conference today. Thank you for joining. You may now disconnect and have a nice day.

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