AstraZeneca Q3 2007 Earnings Call Transcript

AstraZeneca PLC (AZN)

Q3 2007 Earnings Call

November1, 2007 9:00 am ET

Executives

Jonathan Hunt - IR

David Brennan - CEO

Paul Kenyon - Group Financial Controller

Ed Seage - IR

Analysts

Alexandra Hauber - Bear Stearns

Mark Purcell - Deutsche Bank

Paul Mann - Morgan Stanley

Lars Hevreng - Enskilda

Jo Walton - Lehman Brothers

Steve Scala - Cowen

Tim Anderson - Sanford Bernstein

Chris Schott - Bank of America

Michael Leacock - ABN AMRO

Louisa Hector - Lehman Brothers

Andrew Baum - Morgan Stanley

Presentation

Operator

Good day and welcome to the AstraZeneca Q3 Results Analyst Conference Call. Today's conference is being recorded. At this I would like to turn the conference over to Mr. Jonathan Hunt. Please go ahead sir.

Jonathan Hunt

Thank you operator and welcome ladies and gentlemen. Chairing today's call is David Brennan, CEO of AstraZeneca. Also on the call is Paul Kenyon, Group Financial Controller and the investor relations team.

Before I hand over to David, I would like to read the usual statement. The company intends to utilize 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 the operations and financial performance of AstraZeneca. And as [I already mentioned] forward-looking statements involve risks and uncertainty 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.

I will now turn over to David.

David Brennan

Great. Jonathan, thank you. And let me add my welcome to all of you as we spend some time here to discuss our third quarter financial performance. Third quarter really reflects continued progress on our key strategic priorities. Our business is on track to meet our full year earnings target despite some challenging market condition.

The entire organization is getting on with executing our comprehensive plans to drive productivity and efficiency, and we are seeing results those from initiatives.

We are continuing to take steps to strengthen the pipeline. That is our highest priority. We had two additional compounds progressing to Phase III development in the quarter that was PN400 and the Crestor, Abbott fenofibrate fixed-dose combination. That brings the total number of late-stage projects to 10.

And the breadth and depth of the entire portfolio is stronger now than it's ever been, and our plan to be a major force in biologics is coming to life through the creation of the new MedImmune, where the transition has been underway. The combination of MedImmune, CAT, and the existing AstraZeneca biologics assets have now positioned us to be a world leader in this area in the future.

I will spend a next few minutes giving an overview of the company's performance in the third quarter, including an update on the key brands and then Paul Kenyon will flesh out some of the details in the financials, and then we plan on leaving ample time for your questions.

So on to the headline numbers, sales in the third quarter were $7.15 billion, a 10% increase as reported, and a 6% increase on a constant currency basis.

We faced generic competition across the entire dosage range for Toprol-XL in the US beginning in August, so that certainly affected the top line performance. Excluding Toprol-XL, sales were up 9%, 2% of which through the MedImmune. Sales in the US increase 3%, clearly affected by Toprol-XL. Sales in the rest of the world were up 9%.

Operating profit for the quarter was down 7% at constant currency. Keep in mind that operating profit was reduced by $146 million of restructuring costs and by $212 million from the inclusion of MedImmune, as a result of the expected seasonal trading loss, the amortization of intangible assets, and some one-off costs relating to post-acquisition pipeline rationalization.

Reported earnings per share at $0.91 are down 13%, core EPS, which adjust for MedImmune and Merck related amortization, and the restructuring costs, were down 2%. Reflecting as expected, the previously mentioned operating loss in MedImmune, as well as the net interest expense associated with financing the acquisition, Toprol-XL also had an impact.

I will read the details of the year-to-date performance in the press release. All the same factors are worked with restructuring cost playing a more prominent role in the nine months figures. But, underpinning it all is the determined performance in the underlying business.

Now, let me turn to the key brands starting with Nexium. The PPI market certainly meets the definition of challenging. Nexium sales were down 1% in the quarter to just under $1.3 billion. Outside the US sales were up 3% with strong growth in emerging markets, offsetting the decline in Western Europe. Sales in the US were down 3%. In line with our strategy, we continue to grow our market share within the branded PPI segment, but it isn't enough at this stage to offset lower prices and the growth of generic omeprazole.

The fourth quarter will present a difficult year-on-year comparison, as the benefit from the release of the balance sheet provision related to TRICARE in the U.S. was realized in the fourth quarter of 2006. That provision was around a $100 million, of which about half was related to Nexium.

So at this point, we are anticipating that worldwide sales for Nexium may be slightly down for the full year.

Crestor sales increased 25% to $691 million. Sales in the U.S. were up 14% to $342 million. Prescriptions in the U.S. statin market grew by 7% versus the third quarter last year. Crestor prescriptions were up 15%.

Market share is holding steady at 8.6% of total scripts in September in the face of nearly a 6.5 share point gain for generic simvastatin.

We had a strong performance in markets outside the U.S., with sales up 40%. These markets now account for half of Crestor sales and are continuing source of growth for the brand.

As you can see in the press release, we are now over 20% share by volume in Canada and in Italy and almost 15% in France, Japan is already over a 7% share.

Arimidex sales were up 7% to $425 million, on 7 % growth in the U.S. and 8% in the rest of the world.

For Seroquel, we had our first $1 billion quarter, with sale up 22%. Seroquel prescriptions in the U.S. are up 10% through September year-to-date, twice the market growth. Sales in the U.S. were up 24% in the quarter to $760 million. This includes $80 million in the launch stocks for the new Seroquel XR dosage form. The full promotional roll out for XR began, August 20th. We are already well placed on formularies and Medicare and in commercial managed care.

Our strategy is to use Seroquel XR to continue the growth of the total franchise. It is not to drive an accelerated switch of established patients from the immediate-release product to the sustained-release regimen.

But one thing, Seroquel XR is only labeled for the schizophrenia indication, and while some of these patients will switch of course, for others the continuity of remaining on a stable 2 or 3 times a day regimen, that's already working, may be more important to them and their caregivers than the convenience of once a day dosing.

So keep this in mind, when comparing the launch of Seroquel XR with sustained-release launches and other therapeutic categories. Many of which were launched shortly ahead of looming patent expiries. This will have limited utility as benchmarks as we track progress against our plans for Seroquel XR and the entire Seroquel franchise.

We aim to make Seroquel XR the preferred choice for new patient starts in schizophrenia, and then really drive the growth as we build up the full complement of indications for XR, that the IR formulation currently enjoys, including bipolar mania and depression, as well as entirely new indications in major depression and generalized anxiety disorder, that will be unique to the XR formulation. As a result, over time Seroquel XR should become a large portion of the total and bigger Seroquel franchise.

And lastly Symbicort, sales in the quarter increased 25% to $371 million. In Europe, Symbicort's growth has been fueled by increased usage in COPD as well as market share gains in asthma, where the Symbicort's SMART regimen is having a positive impact.

We want Symbicort in the U.S. at the end of June to specialists and the month later to the primary care segment of the market. This is some two months before the normal seasonal uptick in asthma prescriptions begins. That said, the launch is progressing to plan.

Some of the early indicators that tell us we are on track to include the rate of trial and usage by specialists. For example, among our target audience of allergists, one-half have already prescribed Symbicort, and a third of pulmonary specialists have also done so. New prescription share is already 10% among these specialist prescribers.

In the market as a whole, Symbicort share of patients newly started on fixed combination treatment was 9.8% in the latest week, translating into an overall new prescription share of 4.6%.

So for Symbicort, a good performance in the rest of world, combined with a U.S. launch that is on track.

I think I'll leave it there for now and let Paul Kenyon pick up some of the details on the P&L for the quarter, including the impacts of restructuring in MedImmune and he can flesh out our latest thinking for the outlook for the rest of the year, which as I said at the outset is on track to deliver on our full year target EPS. Paul?

Paul Kenyon

Thank you, David. I should now go through the third quarter P&L highlighting the key performance drivers, give a brief overview of the developments of our capital structure and debt financing and conclude by reviewing the full year guidance.

David has already covered the key drivers underpinning the 6% sales growth for the quarter. So, I will not repeat that.

Reported gross margin at of 79.8% of sales is 1.3 point higher than last year. During the quarter, the inclusion of the restructuring costs, MedImmune and high royalty payments depressed margins, while currency and lower contingent payments to Merck had the positive impact. Upon splitting out all those impacts, underlying gross margin increased by half a point on the back of continuing operational efficiencies.

Research and development expenditures increased 32% in constant currency during the quarter. Excluding restructuring costs and the inclusion of MedImmune, the underlying increase is 14%.

Selling, general and administration cost increased by 10% versus the third quarter last year in constant currency terms. On our like-for-like basis stripping out restructuring cost, and MedImmune, SG&A costs were 3% lower than Q3 last year, on the back of continued the cost discipline.

Operating profit, as David has already indicated, was down 7% in the quarter. Reported profits were impacted by $212 million operating loss in MedImmune, reflecting expected seasonality, as well as the previously communicated acquisition related amortization and the one-off charges resulting from post acquisition pipeline rationalization.

Restructuring costs $146 million also depressed reported operating profit. Stripping out both of those impacts would results in operating profit growth with 10%.

Reported operating margin, was 28.3% of sales for the quarter. Stripping out the aforementioned impacts of MedImmune and restructuring would result in an operating margin of 34%, and underlying improvements over the last year 1.7%, as gross margin improvements and disciplined SG&A cost management more than offset the increased investment behind R&D.

Turning to currency, in the third quarter the dollar was weaker on average against our principal currencies compared with Q3 of last year. The positive 4% impact on the sales line drops down to a $0.02 per share benefits to EPS for the quarter, and brings the year-to-date impacts to plus $0.05 in earnings. If exchange rates remain where they are for the balance of the year, we would expect no further impact in Q4.

As promised at our half year results, we have provided a bridge from reported EPS to core EPS for the third quarter and the nine month performance. As a reminder, we have defined core EPS to exclude certain significant items such as amortization of intangible assets from corporate acquisitions and those related with the Merck arrangements, as well as charges and provisions related to restructuring and synergy programs.

On this basis core EPS in the quarter was $1.04, a $0.13 upward adjustment to reported EPS of $0.91. This compares to a core EPS of $1.03 in the third quarter 2006. The press release provides the details of these adjustments for the quarter, as well as the year-to-date figures.

Turning now to the capital structure of the business, at the half year we outlined the Broad's financial policy and priorities for the deployments of cash flow, following the acquisition of MedImmune.

A key element of the strategy was the refinancing of short-term debt, and during the third quarter we completed replacement of $7.9 billion with maturities ranging from 2 years to 30 years. This coupled with the pre-existing long-term debt $1 billion, means that our commercial paper program has been substantially reduced during the quarter and at the end of Q3 stood at around $5.3 billion.

I will help you with your modeling. We would estimate that the weighted average interest rate on the entire gross debt portfolio, the $14.3 billion, is currently around 5.7%. Of that gross debt, 40% is fixed rate and 60% is floating.

Free cash flow before acquisitions was $3.6 billion of the nine months. Cash distributions to shareholders were $5.8 billion, including net share repurchases of $3.1 billion. We remain on track to deliver the previously committed net share buyback of $4 billion for the full year.

I will conclude with the review of our guidance for the full year. As David said at the outset, we are on track to deliver our earnings target for the year as communicated at the half year results announcement. That is, earnings per share in the range of $3.60 to $3.75, excluding the contribution from the US Toprol-XL business and restructuring cost.

Today, we can eliminate other moving parts in our guidance, following generic launch in August across the three remaining strengths of Toprol-XL, we are able to predict the performance of that business with a greater degree of certainty. And now estimate that full year earnings contribution from Toprol-XL in the US of approximately $0.38 per share. This added to the existing guidance gives us an updated range of between $3.98 and $4.13 for the full year, excluding only restructuring costs.

Turning to restructuring costs, we are still anticipating the charge of around $900 million for the full year or $0.44 per share. But, the precise amount recognized in the 2007 accounts is subject to the successful conclusion of employee consultation processes. Although, it's fair to say that we don't anticipate a significant deviation from that forecast.

On a related point, the accounting charges associated with implementing the synergies for the MedImmune acquisition will mainly be a 2008 event with a little impact to this year's figures.

So, in summary, disciplined management of cost is allowing us to invest incrementally in R&D, whilst delivering our earnings targets for the full year.

And with that I'll hand back to David.

David Brennan

Thank you, Paul. And before we go on to the Q&A session I just want to make sure that you've all noted the change in the date for the Biologics Day that we will be holding at MedImmune in the US, in Gaithersburg, Maryland in December. With both BMS and Lilly holding investor events that week, we've moved the date from the 6th of December to Friday, the 7th of December in response to your feedback. The day will be a new format for us. It will allow an in-depth review of the MedImmune science. As I mentioned, it brings together Cambridge Antibody Technology, the AstraZeneca biologics, the work we have been doing with Abgenix, so you get a picture of all of that.

We will also talk about capabilities and discovery, development and manufacturing for our biologics business as well, and we will cover the biologics pipeline. We will also plan in the future to hold other topics specific days. As I think, this type of format allows for a more in-depth review of some of the key areas for our business. So, that will be the format we will use going forward and we will start it with the biologics day at MedImmune in December on the 7th.

With that, operator would please instruct everyone how to signal to ask questions and we will get started with the Q&A sessions. Thank you.

Question and Answer Sessions

Operator

Ladies and gentlemen, the question-and-answer session will be conducted electronically. (Operator Instructions)

Our first question will come from Ms. Alexandra Hauber with Bear Stearns. Please go ahead.

Alexandra Hauber - Bear Stearns

Yes, good afternoon. I have four questions please. David, could you speak a bit to the dynamics in the U.S. patent market. What do you need to do going forward to win a battle for improving market share again. Is it a question of access? Is it a question of convincing doctors not to prescribe generic simvastatin? Is it a question of the patients in the co-pay? And could you also just mention how would a label enhancement with the atherosclerosis label which we will learn next week would fit into that picture?

And second question, since we have different dynamics for Nexium outside the U.S. in the different regions, is there any chance you can give us a rough split of, the size of Western Europe versus the rest of the world?

And then the third question is, at the second quarter result David you were still confident that you can grow the business in the near-term in the next three years in line with the world market. In view of the definitely challenging environment on the PPI and stocking market, are you still confident you can do this?

And then fourth question is a very tiny technical question, in view of the considerable Seroquel XR launch talk, well investor sales through a [hockey stick] in the next few weeks which based on what you described, I wouldn't expect. Is there any risk you have to consider negative sales in the fourth quarter for the XR version?

David Brennan

Okay. Let me start with your question about the U.S. statin market and proposition, I mean clearly the market itself has been significantly impacted by the introduction of generic simvastatin, you see it in, as I said, the loss of share for Lipitor and the share gain for generic simvastatin. And then Vytorin and Crestor have essentially stayed relatively flat.

So our goal is to get back to growth. First thing, we look at is promotion or share a voice in the market is competitive with Lipitor, and just a little bit behind Vytorin, but they are the only three products that are being promoted. So, I think we have been stayed very competitive from a share of voice and sampling perspective, which are couple of the metrics that we can pick up from the market to see how that's doing. I think the messaging will change a bit depending on the outcome of the labeling discussion around the atheroma label.

We expect to have results around that discussion in November. The date for review is coming up relatively quickly. So until we know what that is, it's difficult to say, but I think we believe that we want to continue to demonstrate through our outcomes trials and then anything we can get in the label. That lowering LDL more effectively has a significant benefit in morbidity and mortality, and we want to continue to differentiate based on the efficacy profile Crestor has in the market.

You mentioned patient co-pays, I mean I think there are number of dynamics co-pays and other one that tends to be driving the uptick of generics, a number of managed care companies have foregone co-pays for generic simvastatin. So there has been encouragement to move first to the generics. We have tried to position Crestor as the product not necessarily to compete for first line of treatment when the generic works, but rather for more complicated patients who have a number of additional risk factors or who have just significantly higher cholesterol right from the get-go. That message plays well.

Our share with cardiologists is higher than it is with primary care physicians, which is an indicator that with the more seriously treated patients and in cardiologists we do a bit better. So we are focused on getting back to growth and I think some of that has to come as the generic dynamic gets worked out and we're able to differentiate on the label. I don't know the exact split between Nexium and rest of the world versus US, but I will ask Ed Seage to comment on that.

Ed Seage

Yeah. US is about 65% of the year-to-date figures for Nexium and Western Europe is about 20% of the portfolio.

David Brennan

Ok. Thanks, Ed and then the PPI market in general, I mean, I think you asked about growth. We have said that we think Nexium will -- it's likely that it will negative for the year. Obviously, it will depend on outcome for the fourth quarter, it could be slightly negative. We haven't changed our sales guidance overall. Our guidance has been that we felt we would grow at the rate the market would grow, so I think we are going to stick with that. We said upper single-digits was what we thought this year would be. There's a few numbers around there, so it has slowed down a bit as has the market. So, I think going forward we will continue to stay focused on the market growth. Paul, do you want to comment on that in any way?

Paul Kenyon

No, just a reminder that the guidance we issued was from 2005 to 2010 with that with [RCA] would be in line with the market that means (inaudible).

David Brennan

Okay, good. And then on Seroquel XR launch, the stocking really reflects what it takes to reach over 45,000 retail pharmacies with three different dosage strengths of a product. That is relatively expensive. As a bottle of it is close to probably $500. So, just when we do that across that three dosages and get it into all the pharmacies, it's a high total. I think our expectation on uptake. Well, our expectation on stocking was consistent with the way we normally go about doing this which is the number of bottles that actually go into the pharmacy. We did nothing different with Seroquel XR than we have done with any thing else. Next question.

Operator

Our next question comes from Mr. Mark Purcell from Deutsche Bank. Please go ahead sir.

Mark Purcell - Deutsche Bank

Yeah. Thanks very much. Good afternoon everyone, couple of questions. Firstly on other operating income, appears very strong with third quarter, $197 million contribution. Could you comment on some of the component parts and whether any of them are non-recurring?

Secondly, could you help us to understand, which products you feel are going to be phased in Phase III go/no go decisions in 2008? Third one on Seroquel, given a number of aspects of the Seroquel patent litigation case mirrored at [Zyprexa case], and given recent concessions in your favor. Do you believe Teva is most likely to seek a settlement in this case?

And then I guess lastly on the OTC Prilosec, Perrigo looking to launch at the end of Q1 next year, could you provide us details of the Dexcel's settlement terms and if not at least an updates on the OTC Prilosec sales and capacity at the moment. Thanks.

David Brennan

Okay, Mark. Well, why don't I ask Paul to go ahead and comment about the other operating income area. Whether those things are recurring? What the instance is, whether there were couple of moving parts in there from earlier this year, and for the quarter. Paul you can go ahead and pick that one up.

Paul Kenyon

Yeah. The main mover in the quarter, as you all no doubt have picked up from our press release on page 8, is the inclusion of the MedImmune and that is strong on the back of HPV royalties, which we foresee continuing. So, essentially it's just the addition of MedImmune this time on the back of HPV royalties.

Mark Purcell - Deutsche Bank

Paul could you split out specifically those royalties and if there were any one-offs payments to say attached with products approvals on (inaudible)

Paul Kenyon

There aren't any one-offs that I am aware of, but we can do a detailed analysis and come back to you.

Jonathan Hunt

Yeah. Mark just a comment on that, it's Jonathan. We actually haven't guided on the structure of those payments. And I think is something that contractually, it's not going into public domain. So, we may be warm bell to give you the magnitude, sort of insight into the moving parts if you would want. But you were right, in looking at other operating income, that's a key bit to look at both the performance from Merck and Glaxo.

David Brennan

Finally, on the Phase III go/no go, I am not going to get into specifics around that. I think it's a good question for John Patterson to cover. And quite frankly some of those have to hit milestones before they hit next milestone for go/no go in Phase III. So, it's hard to give the [list]. I mean, I think you can look at some of the later-stage programs in the Phase IIb category and depending on how long those programs need to run, we hope to have a handful to deal with next year if not more.

Regarding the Seroquel situation, you asked is it likely to settle? I mean, Teva lost the structural obviousness argument and they challenged both Zyprexa (inaudible) have not succeeded and it's the same kind of challenge against Seroquel. We have said all alone, we believe that our intellectual property on Seroquel is sound and in expect to demonstrate that and we will vigorously defend that patent with every opportunity that we get and we are not looking to settle anything. And on Prilosec OTC, I think that's a Procter & Gamble question. I don't have available the amount of products that they are buying from us. But, quite frankly, that is really our relationship with them. It's a classic supply arrangement and they are the once who will be dealing with the introduction of additional products in the markets. I will pass on that one.

Mark Purcell - Deutsche Bank

Okay, thanks very much.

David Brennan

Thanks Mark. Next question please.

Operator

We will take our next question from Mr. Paul Mann from Morgan Stanley. Please go ahead, sir.

Paul Mann - Morgan Stanley

Hi. Just a quick question or two quick questions actually. Just going with other operating income the consensus is, it looks like the consensus, you sent out the other day is broadly flat to about $500 million. I know you are not going to comment on the royalty rate. But they have consensus guidance and the [service] forecast are correct. Is it possible that line could exceed a $1 billion at some point? That's my first question.

Second one, just on Seroquel XR, when you think about the dollar value of Seroquel and the dollar value per indication, taking into account the duration of treatment, the dose, as well as the patient population of each indication. What percentage of the value of Seroquel currently exists for Seroquel XR. Can you in some way quantify how you would expect that to progress over the next sort of 24 months?

David Brennan

Okay. Let me do the Seroquel question first and then I'll let Paul talk a little bit more about the operating income question and how big that could get in, what else we're going to say, but I am not sure if there is a lot more to say. As I said with the XR, the initial indication is in schizophrenia. I believe schizophrenia accounts for about a third of the total sales where the bipolar mania and depression market is probably twice that size and growing much faster. The dosing in bipolar is the lower generally than with the schizophrenia. So, there is some trade-off there as you are just looking at that.

The point I made in my opening comments about the importance of making sure that we're promoting on label is very, very important to us. So the only discussions we will be having around Seroquel XR initially will be around schizophrenia. It actually is the better positioning for the product right now, because it allows people to get the dose on the second day. So there is not as much dosage titration required than it is once a day, which is, why I said earlier, we expect to have this become a leading product from a selection perspective for the treatment of schizophrenia.

The generalized anxiety disorder and the major depression indications for XR which we hope to get in the future when the trials are completed assuming they all are positive, will take us into some segments of the market that we haven't been in before. I think it's difficult to quantify that. But as I said, our strategy here is not a switch strategy exclusively, we believe there will be some switching. But, we're going to establish Seroquel XR in and of its own right person's schizophrenia than in bipolar mania and depression and hopefully in major depressive disorder and generalized anxiety disorder, subsequently getting us to a bigger overall franchise.

Jonathan Hunt

Yeah, Paul. Well, we haven't given specifics of how to model it. We have given you some help. If you look at the general presentation, it's on the website, you can download. There is a nice slide in that. You're looking at exactly the right components, prevalence in the three different -- I think it's in the three different markets schizophrenia, bipolar and depression. The prevalence rate differ, is a slide that covers that, the duration -- expected duration of treatment that is on the average dosage. So if you got those three component parts, you can make a good guess how you think those markets will play out.

Paul Mann - Morgan Stanley

Thank you.

David Brennan

Thanks Paul. Next question please.

Operator

Our next question comes from Mr. Lars Hevreng from Enskilda. Please go ahead, sir.

Lars Hevreng - Enskilda

Yes, thank you. It's Lars Hevreng, Enskilda. Just regarding the guidance, this may be great interpretation, is it fair to simply add back, roughly $0.20 to your $3.98 of $4.13 to arrive at, what you would define as core EPS for going forward. So adding back $0.20 per share, is that the fair interpretation regarding the guidance? That's one thing.

The thing, to Paul? Is there any write-down assumed for the fourth quarter, or is this $0.03 per share contribution is simply the underlying sales of Toprol? Thank you.

David Brennan

All right. Well, I will go to Paul in just a moment. I just want to reinforce because there are number of different components around restructuring, around how we have accounted for Toprol-XL as well as MedImmune that are impacting things. We tried to be very clear about our reported statutory earnings and then the core earnings that we look at which we think are better indicator of how the underlying business is performing.

So, that's told out very clearly in the press release, and Paul and I both covered it. I am not sure what else we can add to it. Is there another way to at core? Ed, do you want to comment on that?

Ed Seage

Yeah, I think the key is keeping the distinction between what core EPS represents.

David Brennan

The distinction between what core EPS represents and what the business excluding the full impact of MedImmune, those are two separate things. Core only adjusts for the amortization component of the MedImmune contribution to our EPS number, whereas you look at the all in, which we got it to around $0.30 of the impact, $0.30 loss is within the scope of our guidance of $3.98 to $4.13. So the full impact of MedImmune consolidation is in our guidance on a reported basis.

Core EPS only adjust for the amortization component of the MedImmune, not their seasonal trading loss, not any in the one-offs, and not any in the net interest finance expense, that's associated with finance and the acquisition. So, there are two separate halves. I think you just can't bridge from one to the other thinking, it's all MedImmune in or out, they are only pieces of that.

Lars Hevreng - Enskilda

All right. And Paul, do you want to comment on the write-downs in the fourth quarter, I mean just the restructuring program we have in place is the only activity like that, right?

Paul Kenyon

That's right. And as we got into the half year, the majority of the write-downs come in the fourth quarter. It's covered in the press release. We had about $600 million so far. We put about $900 million for the full year, so we are expecting around $300 million in the fourth quarter.

Lars Hevreng - Enskilda

But there is no write down Toprol-XL, specifically in the fourth quarter since the guidance is only $0.03 per share in the fourth quarter?

David Brennan

That is a product of the generic erosion that we have seen in the third quarter, hopeful strengths have gone now. So, we are down generic erosion sales rate.

Lars Hevreng - Enskilda

Okay, thank you.

David Brennan

Thanks Lars. Next question please.

Operator

Our next question comes from Jo Walton from Lehman Brothers. Please go ahead.

Jo Walton - Lehman Brothers

Two quick questions please, within the MedImmune, $212 million of operating loss, is that representative of what MedImmune would do in a typical third quarter, or what it is inflated by one-off costs you mentioned, pipeline rationalization, etcetera, is any of that included. And can you give us some idea of what any one-offs surrounding MedImmune would might be like?

And the second question is a broader question about the deteriorating outlook in the US market where you talk about a lot of competition in some of your key areas. With that knowledge do you believe that you have got the right size of sales force and promotional effort behind those products to maximize them? Are we seeing some of the decline in the race of prescription growth, because you have pulled back on promotion to a great extent then your peers?

David Brennan

All right. Those are two good questions, Jo, thank you. I'll do the second question, first about the US and then I will go back to Paul to comment on the MedImmune 212 and whether it's typical or one-off or what we can say about it. As I have mentioned before with Crestor and I will broaden that now to include Nexium, Symbicort and on the oncology portfolio. We look very carefully at our overall promotional levels. And I said in the statin market, we are fully competitive with Lipitor, Vytorin have increased there promotion a little bit earlier this year, so they are slightly. But, the three products are very close to each other in terms of personnel selling activity, details and calls in the marketplace. I think we are very competitive there and we haven't pulled back in any way from that. In fact, I think we just targeted right level where we want to be.

With next Nexium, the overall level of promotion in the PPI market has come down a bit, because the competitors have reduced their promotional activity. Nexium is still the leading promoted product both in term of personnel selling, as well as in sampling in the market. And I think our view is that we are going to maintain our leadership position in promotion and continue to differentiate the product into the branded segment of the market, which is, as I said where we need to compete.

I don't think that this product is been impacted in any way by calling back on promotion in this market. We've been very active in direct-to-consumer advertising there, but we've used it. We [posted] that and can continue to do that. So, we are reevaluating that program, but it's not a constraint financially.

On Symbicort, we have a target audience of where we want to be. Our promotional activity right now in the first couple of months -- actually our call levels are ahead of the call levels for ADVAIR in the market. Our expectation is that we'll be competitive with them with the new product introduction. We expect we are going to get increased activity at the front-end. And with our oncology portfolio, I think we have done quite well to remain competitive. Arimidex continues to grow. We now promote Abraxane. The Abraxane product has increased share under our sales force. So, Zoladex, Arimidex, Casodex have all continued to perform reasonably well.

So, no, Jo, I don't think we pull back in way that's impacted our own. Our other activity -- I think we are right sized. With the portfolio that we have and as we pick some primary care products, hopefully later in the next couple of years with saxagliptin and dapagliflozin closing as potentially 6140 and may be even some others, we expect to be busy. And I think those markets are going to continue to be competitive, to the first part of your question. But, they are big markets. 70% of PPI market is still $12 billion market to compete in and the statin market is going to continue to have a significant segment of use for branded products that are more effective in lowering LDL than generics. It won't be as big as it used to be, but that's okay. We still need to be there to compete.

Paul do you comment on the MedImmune $212 million and what you want say?

Paul Kenyon

Sure. The split is about a $140 million of ongoing operating loss in Q3. As you would expect the one-offs are about $70 million, Jo.

Jo Walton - Lehman Brothers

And are we expecting more one-offs because it is pretty early on, I don't know of couple of $100 million before we are through that process?

Paul Kenyon

Yeah. We guided at the half year that there would be more than $200 million of integration costs and we still expect the bulk of those come in 2008, as I said in my presentation.

Jo Walton - Lehman Brothers

Thank you

David Brennan

Thanks Jo. Next question.

Operator

Our next question comes from Mr. Steve Scala from Cowen. Please go ahead, sir.

Steve Scala - Cowen

Thank you. I have several questions. First, what was the tax rate after removing restructuring cost and MedImmune related amortization derives the core EPS number? And secondly, can you update us on what is currently happening relative to the AZLP valuation. And how is the accounting firm factoring in the risk to Nexium, both from the commercial standpoint as well as the patent risk. And relatedly, do you have a final answer from FDA regarding the claim of cardiovascular risk with Nexium? Thank you.

David Brennan

Okay. Well, let me start with the last question first and then I will go to Paul to get to the tax rate and comment on AZLP as well as how the accounting crowd is assessing the Nexium risk or the patent risk around it. But the discussions with the FDA around the cardiovascular risk issue that was reported in the December have been ongoing, there is no new news. I think our position on this was very clear.

And the agency saw that, we did not see that there was a particular issue left open that needed to be resolved. We have done some additional work and we are going over it with them, but we don't have any reason to believe that we have any additional risk in cardiovascular events. But we are in discussions with them to make sure that they have seen all the data that we have. So, that there is no question in their mind either.

Paul, do you want to comment on the issues around -- with tax rate with MedImmune piece in that.

Paul Kenyon

The tax rate, we used to calculate in core EPS is the same as we used for the reported EPS and we keep it simple. The AZLP valuation, sorry what was the specific question you have on that?

Steve Scala - Cowen

Paul, what is currently ongoing now since the valuation, I understand that's to be delivered early next year? And then, how was the accounting firm going about assessing the risk in Nexium's commercial outlook as well as the patent, I assume they are gathering data from you in perspective or exactly how they are going about that process?

Paul Kenyon

Ed Seage, do you want to comment on those, Ed?

Ed Seage

Yeah, I think you have got a bit of the cart before the horse there, Steve. The first activity related to the exit arrangements of 2008 is the appraised value on the first option. So any valuation exercises that will be conducted ahead of the notice period in the early part of next year are around valuing the net present value of the contingent payments on the old Astra Merck Incorporated products. So it's the (inaudible) and the only factor there in terms of the product is not on the market that has to be considered is the AZD-6140.

Any activity in terms of trying to value Nexium is related to the second option and that's not even triggered until two years after the exercise of the first option and that's still downstream. So there is nothing just to report in terms of how any objectives third-party appraiser will tackle that, but it's early on even begin to speculate, because it's an event that has yet to be even triggered by the first activity which is exercise or [none of] the first option.

Steve Scala - Cowen

But what in Merck exercises, the first option, the key to what might be the outlook relative to Nexium and hence they might not be willing to exercise the first option. So you can exercise the second, might they interrelated in the end?

Paul Kenyon

You will have to talk to Merck about that.

Steve Scala - Cowen

Thank you.

Paul Kenyon

They have the first call.

David Brennan

Good, next question?

Operator

We will take our next question from Mr. Tim Anderson from Sanford Bernstein. Please go ahead, sir.

Tim Anderson - Sanford Bernstein

Thank you. I have a few questions. The first, on Nexium, is this the category where we should expect to see continued net price declines each year for the next several years in the U.S. as more and more generics become available?

Second question is on Crestor, and the FDA action date coming up for your atherosclerosis claim from ASTEROID and METEOR, is it realistic to expect that you will get a broad-based atherosclerosis claim?

And then last question on saxagliptin with Bristol-Myers, what's your confidence level that you have a fileable drug during the first half of '08 that has been the guidance. It just can't help but wonder if that drug gets delayed ultimately because of various potential safe issues including impact of that product on blood platelets that was seen in the Phase II trials?

David Brennan

Okay. Let me start with Nexium, I mean we have seen a continued price decline in the U.S. It has been just part of our strategy around a pricing and trying to gain share. We are now focused on trying to gain share from our competitors in the branded segment of the markets. So, I expect we will continue to see some erosion of price over time, as we have seen it.

On the atherosclerosis claim, the discussion is still pending with the agency and we really don't comment on ongoing discussions. So until it's actually concluded and we see where it has ended up, I think that will impact then our opportunity to differentiate and promote. We think we have got good data than what we filed and we believe that there is some benefit that should be ascribed to Crestor as a result of it. But until we get it resolved, it's hard to -- we can't comment on it.

Regarding Saxagliptin, our plans are still to submit the NDA in the first half of next year. It's pending positive outcome from the ongoing Phase III trials, along with the risk benefit profile, including any adverse events that are reported. So we don't have a particular reason that we are concerned about beyond just making sure that, we've got the risk benefit balance characterized properly through the program and it's viable, that's what we're targeting.

Tim Anderson - Sanford Bernstein

Thank you.

David Brennan

Thanks, Tim. Can we have the next question please?

Operator

Our next question comes from Mr. Chris Schott from Bank of America.

Chris Schott - Bank of America

Hi, great. Thank you, just a couple of quick questions. Maybe first on market growth, I think earlier you addressed your competitive share of voice. Can you talk about the overall US markets? I think that we are seeing slowing volume growth for entire categories and some of the segments you compete, after a first strong half. Just what's your view of driving this? Just I was seeing impacts from (inaudible) and Part D just over comps. Any clarity there would be appreciated. Seroquel trends, I was still seeing positive year-over-year mix shift for Medicare Part D and Dual Eligibles or is all that behind the company at this point. And then finally on 6140 update where you are enrollment is regards to Phase III. Thanks.

David Brennan

Okay. Well, I'll comment on the market growth and ask again for a bit on the -- take a look at the mix shift, but I don't think there is much more to say around the Dual Eligibles. So, I think most of that happened at the beginning of the last year and it's not impacting the business right now. All I ask Ed to take a quick look, while I am answering the first question. I think the growth in the US market is slowing. I think IMS just reported that they have lowered their outlook for overall growth. Yesterday, I believe they did their annual projection of what they are expecting and it's lower than what they said last year. So, it's slowing down.

What's driving it? First thing I think has been the utilization of generics, especially in the two largest markets in the US has exceeded what the assumptions were. So, I think that's part of it. There is additional pressure in the co-pay areas. So, for some brands, I think maybe certain segments to the market get this proportionately affected. And I think the Medicare Part D benefit provided a significant opportunity for growth, and at the same time it is also been a significant opportunity to use of generic. So, I think both of those things are impacting the market overall, and you are probably seeing less aggressive pricing from a price increase perspective, as well and there haven't been as many new products introduced.

So, there are multiple factors, but generally I think that's the trend. The US market is still, I guess, between 6% and 7% this year. Our growth there exceeded that. So, we are gaining share in the market and performing well. And we will have to see what other pressures come to there. Ed, do you want to comment on?

Ed Seage

Yeah. Then broadly speaking most of the year-on-year impact of Dual Eligibles is anniversaried out.

David Brennan

And the 6140 is progressing. Jonathan you want to comment on that? I think we are probably may be about half way through the 16,000, 17,000 patients?

Jonathan Hunt

Yeah, it's moving along reasonably well. I think at the half year we were probably about 4,000 or 5,000 patients, moved out to about 7,000 patients on the latest view.

David Brennan

All right, Chris.

Chris Schott-Bank of America

Thank you.

David Brennan

Thanks. Next question

Operator

Our next question comes from Michael Leacock from ABN AMRO. Please go ahead.

Michael Leacock - ABN AMRO

Thank you. Hi, just a couple of questions. Firstly, am I wonder if you could give us a your perspective on the December 13th advisory committee on Mevacor going over the counter. And what you think the impact would be on your business if that were to be ruled?

Secondly, I was just wondering going to back to other operating income, I think Jon Symonds said at the Q2 that the full year [OOI] would be around $500 million excluding the HPV royalties, is that still the case. And I wonder David you've been very kind in giving us a clear bridge in terms of the cost between the reported EPS and the core EPS. Could you highlight just what synergies in savings that's actually been achieved so far.

David Brennan

Very good. Well, let me start with the Mevacor. I believe that there is a role for potentially and over-the-counter product in this category, if you are asking me that. That’s difficult to assess. I think our view has been that the increased efficacy that has been seen with the products that have succeeded Mevacor. So, Merck introduced Zocor, Pravachol came out and Lipitor and finally Crestor. That the incremental benefit of lowering LDL, cholesterol and potentially the increase in HDL has absolutely demonstrated that there is a decrease in morbidity and mortality associated with using the more effective treatments. So, my view is that the more effective treatments are the ones that should be considered, whether there is role for a low dose over-the-counter product for people who have mildly, slightly elevated cholesterol levels is something that committee is going to have to coming on. But, we are operating in a different segment of that market with Crestor now. Do you want to comment on the operating income…

Paul Kenyon

Jon did guide $0.5 billion half year, if we stand by that guidance little bit, we will be probably rounding down to $0.5 billion excluding MedImmune.

David Brennan

And on synergies, Paul, I haven't seen exactly how we have reported out on that other than to say we have the target for around $500 million that could be MedImmune integration by 2010.

Paul Kenyon

And we remain on track to deliver that.

David Brennan

Remain on track to deliver that.

Paul Kenyon

Previously guided, there won't be much this year, it will be mainly '08 only.

Michael Leacock - ABN AMRO

Thank you very much.

David Brennan

Thanks Michael. Next question.

Operator

Our next question comes from Ms. [Louisa Hector] from Lehman Brothers. Please go ahead madam.

Louisa Hector - Lehman Brothers

Good afternoon. I have a question on formulary positioning. I think David you mentioned the Seroquel XR that you are comfortable with the positioning, so are we seeing Tier II here? And the same question really for Symbicort, I guess what percentage Tier II?

And then just a follow-up on Symbicort, you said you're comfortable with the launch progress that $4 million in the quarter has been quite low. Is this just a seasonal effect, is there sampling, that's [sort of securing] the numbers or that perhaps formulate positioning that's holding your back?

David Brennan

Okay. Let me speak about each of them separately. The Symbicort formulary positioning has been very competitive, were available in over 75% of covered lives, which is above our target and actually ahead of where we were with Nexium and Crestor at the same time in terms of the introduction. And product has been tiered effectively at the same level as Advair is because it does vary from plan to plan, depending on where they have it, I believe haven't preferentially given any discounts to get preferentially tearing.

I think we have remained competitive price-wise and the formularies have in general been pleased to have another product in this category because they recognized there is unmet medical need and that Symbicort is a good product. So we're not in anyway disadvantaged I think and we're continuing to get more acceptances.

There is a seasonality associated with it and as our launch stocking went in right at the end of the second quarter, we did not expect that there would be a big uptick in the third quarter because of the seasonality and the fact that we were just getting launched. As I said, the metrics we are following as used by allergists and by pulmonologists. We had seen as I said 50% of allergists have used the product and we are getting uptick in some new patients starts. So, all the things we follow are consistent with our launch plans.

For Seroquel XR, the formulary positioning has been relatively the same as we have for Seroquel IR. We priced the product at the same level, because we didn't want advantage it or disadvantage it any way and most organization have accepted it as such. So again, I think we've got virtually the same kind of coverage with the XR now as we have with IR, plus or minus are very little bit. So, it's positioned well.

We have time for one more question. So, do we have our last question?

Operator

Our last question comes from Andrew Baum from Morgan Stanley. Please go ahead, sir.

Andrew Baum - Morgan Stanley

Hello. Just a couple of short questions. Firstly, perhaps you could outline your risk management strategy when it comes to outsourcing. Clearly, by taking part of the manufacturing out of your hands, the risk profile is going up. So I would be interested to know how you are managing that building redundancy and to ensure GMP demand is satisfied throughout the process?

Second if you have anything to add on the Cobalt ANDA filing on Crestor as far as you understand what are the claims of invalidity which Cobalt is making what does it refer to?

David Brennan

Okay. On the risk management and outsourcing, obviously that's a high priority for us. So safety first, with everything that we do assuring ourselves that there is safeguards in place with any suppliers that we would use that are the same ones that we use internally to assure ourselves that the quality of what's being done is up to the standard that we wanted to be done that.

And there are number of steps that have been put in place especially in the manufacturing area, the transition periods tend to be slower because of the regulatory requirements. As you know, there are a number of regulatory issues that have to be resolved and then we have to be able to demonstrate that anybody that we would outsource anything to meets the same level and standard as is required by the regulations and our own standard at least as good if not better than the regulations.

So I think we've been looking at this pretty aggressively. We are looking from a supply chain perspective to maintain control of the patient facing end of the supply chain. But we do see opportunities in the API area in the early stage of chemistry to outsource some of it. And we would do some in other areas we won't, for example with biologics, we will own it all I think. So, it probably goes both ways.

Not a of color to add on the second one to Cobalt. They have challenged, Jonathan and I were talking about it, in 17 of the top 20 products have been challenged. So this is obviously a strategy that's being followed by the generics and this is a substance patent challenge. So, it's right at the core of where we are -- very, very determined to demonstrate the validity of our patents and the enforceability of them. So, next steps have to be taken. This has just happened which is why we disclosed that this morning and we will deal with it the way we deal each case, tends to get its own weakness. And so we will start to develop this one and see where it takes us, but we are confident in our intellectual property and we are going to push hard on it, Andrew?

Andrew Baum - Morgan Stanley

Thank you.

Jonathan Hunt

Thank you for that. And operator I think that's it. So I would like to thank all of you for participating in our conference today, and as always, if you have questions, please feel free to contact our IR Group and get them answered. Thank you for being here today. Operator, that concludes our section.

Operator

That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.

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