AstraZeneca Q3 2007 Earnings Call Transcript

Nov. 1.07 | About: AstraZeneca Group (AZN)

AstraZeneca PLC (NYSE: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 - SanfordBernstein

Chris Schott - Bank of America

Michael Leacock - ABN AMRO

Louisa Hector - Lehman Brothers

Andrew Baum - Morgan Stanley

Operator

Good day and welcome to the AstraZeneca Q3 Results AnalystConference Call. Today's conference is being recorded. At this I would like toturn 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 isPaul Kenyon, Group Financial Controller and the investor relations team.

Before I hand over to David, I would like to read the usualstatement. The company intends to utilize the Safe Harborprovisions of the United States Private Securities Litigation Reform Act, of1995. Participants on this call may make forward-looking statements withrespect to the operations and financial performance of AstraZeneca. And as [Ialready mentioned] forward-looking statements involve risks and uncertainty andresults may differ materially from those expressed or implied by theseforward-looking statements. The company undertakes no obligation to updateforward-looking statements.

I will now turn over to David.

David Brennan

Great. Jonathan, thank you. And let me add my welcome to allof you as we spend some time here to discuss our third quarter financialperformance. Third quarter really reflects continued progress on our keystrategic priorities. Our business is on track to meet our full year earningstarget despite some challenging market condition.

The entire organization is getting on with executing ourcomprehensive plans to drive productivity and efficiency, and we are seeingresults those from initiatives.

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

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

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

So on to the headline numbers, sales in the third quarterwere $7.15 billion, a 10% increase as reported, and a 6% increase on a constantcurrency basis.

We faced generic competition across the entire dosage rangefor Toprol-XL in the USbeginning in August, so that certainly affected the top line performance.Excluding Toprol-XL, sales were up 9%, 2% of which through the MedImmune. Salesin the USincrease 3%, clearly affected by Toprol-XL. Sales in the rest of the world wereup 9%.

Operating profit for the quarter was down 7% at constantcurrency. Keep in mind that operating profit was reduced by $146 million ofrestructuring costs and by $212 million from the inclusion of MedImmune, as aresult of the expected seasonal trading loss, the amortization of intangibleassets, and some one-off costs relating to post-acquisition pipelinerationalization.

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

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

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

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

So at this point, we are anticipating that worldwide salesfor 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 inSeptember 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 arecontinuing source of growth for the brand.

As you can see in the press release, we are now over 20%share by volume in Canadaand 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 inthe U.S.and 8% in the rest of the world.

For Seroquel, we had our first $1 billion quarter, with saleup 22%. Seroquel prescriptions in the U.S. are up 10% through Septemberyear-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 newSeroquel XR dosage form. The full promotional roll out for XR began, August20th. We are already well placed on formularies and Medicare and in commercialmanaged care.

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

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

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

We aim to make Seroquel XR the preferred choice for newpatient starts in schizophrenia, and then really drive the growth as we buildup the full complement of indications for XR, that the IR formulation currentlyenjoys, including bipolar mania and depression, as well as entirely newindications in major depression and generalized anxiety disorder, that will beunique to the XR formulation. As a result, over time Seroquel XR should becomea 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 growthhas been fueled by increased usage in COPD as well as market share gains inasthma, where the Symbicort's SMART regimen is having a positive impact.

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

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

In the market as a whole, Symbicort share of patients newlystarted on fixed combination treatment was 9.8% in the latest week, translatinginto 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 pickup some of the details on the P&L for the quarter, including the impacts ofrestructuring in MedImmune and he can flesh out our latest thinking for theoutlook for the rest of the year, which as I said at the outset is on track todeliver on our full year target EPS. Paul?

Paul Kenyon

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

David has already covered the key drivers underpinning the6% sales growth for the quarter. So, I will not repeat that.

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

Research and development expenditures increased 32% in constantcurrency during the quarter. Excluding restructuring costs and the inclusion ofMedImmune, the underlying increase is 14%.

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

Operating profit, as David has already indicated, was down7% in the quarter. Reported profits were impacted by $212 million operatingloss in MedImmune, reflecting expected seasonality, as well as the previouslycommunicated acquisition related amortization and the one-off charges resultingfrom post acquisition pipeline rationalization.

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

Reported operating margin, was 28.3% of sales for thequarter. Stripping out the aforementioned impacts of MedImmune andrestructuring would result in an operating margin of 34%, and underlyingimprovements over the last year 1.7%, as gross margin improvements anddisciplined SG&A cost management more than offset the increased investmentbehind R&D.

Turning to currency, in the third quarter the dollar wasweaker on average against our principal currencies compared with Q3 of lastyear. The positive 4% impact on the sales line drops down to a $0.02 per sharebenefits 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 ofthe year, we would expect no further impact in Q4.

As promised at our half year results, we have provided abridge from reported EPS to core EPS for the third quarter and the nine monthperformance. As a reminder, we have defined core EPS to exclude certainsignificant items such as amortization of intangible assets from corporateacquisitions and those related with the Merck arrangements, as well as chargesand provisions related to restructuring and synergy programs.

On this basis core EPS in the quarter was $1.04, a $0.13upward 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 ofthese adjustments for the quarter, as well as the year-to-date figures.

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

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

I will help you with your modeling. We would estimate thatthe 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 rateand 60% is floating.

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

I will conclude with the review of our guidance for the fullyear. As David said at the outset, we are on track to deliver our earningstarget for the year as communicated at the half year results announcement. Thatis, earnings per share in the range of $3.60 to $3.75, excluding thecontribution 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 degreeof certainty. And now estimate that full year earnings contribution from Toprol-XLin the USof approximately $0.38 per share. This added to the existing guidance gives usan updated range of between $3.98 and $4.13 for the full year, excluding onlyrestructuring costs.

Turning to restructuring costs, we are still anticipatingthe 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 successfulconclusion of employee consultation processes. Although, it's fair to say thatwe don't anticipate a significant deviation from that forecast.

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

So, in summary, disciplined management of cost is allowingus to invest incrementally in R&D, whilst delivering our earnings targetsfor 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 sessionI just want to make sure that you've all noted the change in the date for theBiologics Day that we will be holding at MedImmune in the US, in Gaithersburg, Maryland in December. With bothBMS and Lilly holding investor events that week, we've moved the date from the6th 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 theMedImmune science. As I mentioned, it brings together Cambridge AntibodyTechnology, 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 willcover the biologics pipeline. We will also plan in the future to hold othertopics specific days. As I think, this type of format allows for a morein-depth review of some of the key areas for our business. So, that will be theformat we will use going forward and we will start it with the biologics day atMedImmune in December on the 7th.

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

Question and AnswerSessions

Operator

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

Our first question will come from Ms. Alexandra Hauber withBear 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 youneed to do going forward to win a battle for improving market share again. Isit a question of access? Is it a question of convincing doctors not toprescribe 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 theatherosclerosis label which we will learn next week would fit into thatpicture?

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

And then the third question is, at the second quarter resultDavid you were still confident that you can grow the business in the near-termin the next three years in line with the world market. In view of thedefinitely challenging environment on the PPI and stocking market, are youstill 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 salesthrough a [hockey stick] in the next few weeks which based on what youdescribed, I wouldn't expect. Is there any risk you have to consider negativesales in the fourth quarter for the XR version?

David Brennan

Okay. Let me start with your question about the U.S. statinmarket and proposition, I mean clearly the market itself has been significantlyimpacted 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. Andthen Vytorin and Crestor have essentially stayed relatively flat.

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

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

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

Our share with cardiologists is higher than it is withprimary care physicians, which is an indicator that with the more seriouslytreated patients and in cardiologists we do a bit better. So we are focused ongetting back to growth and I think some of that has to come as the genericdynamic gets worked out and we're able to differentiate on the label. I don'tknow the exact split between Nexium and rest of the world versus US, but I willask Ed Seage to comment on that.

Ed Seage

Yeah. US is about 65% of the year-to-date figures for Nexiumand Western Europe is about 20% of theportfolio.

David Brennan

Ok. Thanks, Ed and then the PPI market in general, I mean, Ithink you asked about growth. We have said that we think Nexium will -- it'slikely that it will negative for the year. Obviously, it will depend on outcomefor the fourth quarter, it could be slightly negative. We haven't changed oursales guidance overall. Our guidance has been that we felt we would grow at therate the market would grow, so I think we are going to stick with that. We saidupper single-digits was what we thought this year would be. There's a fewnumbers around there, so it has slowed down a bit as has the market. So, Ithink 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 from2005 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 stockingreally reflects what it takes to reach over 45,000 retail pharmacies with threedifferent dosage strengths of a product. That is relatively expensive. As abottle of it is close to probably $500. So, just when we do that across that threedosages and get it into all the pharmacies, it's a high total. I think ourexpectation on uptake. Well, our expectation on stocking was consistent withthe way we normally go about doing this which is the number of bottles thatactually go into the pharmacy. We did nothing different with Seroquel XR thanwe have done with any thing else. Next question.

Operator

Our next question comes from Mr. Mark Purcell from DeutscheBank. 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, $197million contribution. Could you comment on some of the component parts and whetherany of them are non-recurring?

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

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

David Brennan

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

Paul Kenyon

Yeah. The main mover in the quarter, as you all no doubthave 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, whichwe foresee continuing. So, essentially it's just the addition of MedImmune thistime on the back of HPV royalties.

Mark Purcell -Deutsche Bank

Paul could you split out specificallythose royalties and if there were any one-offs payments to say attached withproducts approvals on (inaudible)

Paul Kenyon

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

JonathanHunt

Yeah. Mark just a comment on that, it'sJonathan. We actually haven't guided on the structure of those payments. And Ithink is something that contractually, it's not going into public domain. So, wemay be warm bell to give you the magnitude, sort of insight into the moving partsif 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 getinto specifics around that. I think it's a good question for John Patterson tocover. And quite frankly some of those have to hit milestones before they hitnext milestone for go/no go in Phase III. So, it's hard to give the [list]. Imean, I think you can look at some of the later-stage programs in the Phase IIbcategory and depending on how long those programs need to run, we hope to have ahandful to deal with next year if not more.

Regarding the Seroquel situation, you asked is it likely tosettle? I mean, Teva lost the structural obviousness argument and they challengedboth Zyprexa (inaudible) have not succeeded and it's the same kind of challengeagainst Seroquel. We have said all alone, we believe that our intellectualproperty on Seroquel is sound and in expect to demonstrate that and we willvigorously defend that patent with every opportunity that we get and we are notlooking 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 arebuying from us. But, quite frankly, that is really our relationship with them. It'sa classic supply arrangement and they are the once who will be dealing with theintroduction 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 fromMorgan Stanley. Please go ahead, sir.

Paul Mann - MorganStanley

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

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

David Brennan

Okay. Let me do the Seroquel question first and then I'lllet Paul talk a little bit more about the operating income question and how bigthat could get in, what else we're going to say, but I am not sure if there isa 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 thebipolar mania and depression market is probably twice that size and growingmuch faster. The dosing in bipolar is the lower generally than with theschizophrenia. So, there is some trade-off there as you are just looking atthat.

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

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

Jonathan Hunt

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

Paul Mann - MorganStanley

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 regardingthe 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'sone thing.

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

David Brennan

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

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

Ed Seage

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

David Brennan

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

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

Lars Hevreng - Enskilda

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

Paul Kenyon

That's right. And as we got into the half year, the majorityof the write-downs come in the fourth quarter. It's covered in the pressrelease. We had about $600 million so far. We put about $900 million for thefull 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 thefourth quarter since the guidance is only $0.03 per share in the fourthquarter?

David Brennan

That is a product of the generic erosion that we have seenin the third quarter, hopeful strengths have gone now. So, we are down generic erosionsales 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 - LehmanBrothers

Two quick questions please, within the MedImmune, $212million of operating loss, is that representative of what MedImmune would do ina 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 giveus some idea of what any one-offs surrounding MedImmune would might be like?

And the second question is a broader question about thedeteriorating outlook in the USmarket 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 salesforce and promotional effort behind those products to maximize them? Are weseeing some of the decline in the race of prescription growth, because you havepulled back on promotion to a great extent then your peers?

David Brennan

All right. Those are two good questions, Jo, thank you. I'lldo the second question, first about the US and then I will go back to Paulto comment on the MedImmune 212 and whether it's typical or one-off or what wecan say about it. As I have mentioned before with Crestor and I will broadenthat now to include Nexium, Symbicort and on the oncology portfolio. We lookvery carefully at our overall promotional levels. And I said in the statinmarket, we are fully competitive with Lipitor, Vytorin have increased therepromotion a little bit earlier this year, so they are slightly. But, the threeproducts 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 andwe haven't pulled back in any way from that. In fact, I think we just targetedright level where we want to be.

With next Nexium, the overall level of promotion in the PPImarket has come down a bit, because the competitors have reduced theirpromotional activity. Nexium is still the leading promoted product both in termof personnel selling, as well as in sampling in the market. And I think ourview is that we are going to maintain our leadership position in promotion andcontinue 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 wayby calling back on promotion in this market. We've been very active in direct-to-consumeradvertising there, but we've used it. We [posted] that and can continue to dothat. So, we are reevaluating that program, but it's not a constraintfinancially.

On Symbicort, we have a target audience of where we want tobe. 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 productintroduction. We expect we are going to get increased activity at thefront-end. And with our oncology portfolio, I think we have done quite well toremain competitive. Arimidex continues to grow. We now promote Abraxane. The Abraxaneproduct 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'simpacted our own. Our other activity -- I think we are right sized. With theportfolio that we have and as we pick some primary care products, hopefullylater in the next couple of years with saxagliptin and dapagliflozin closing aspotentially 6140 and may be even some others, we expect to be busy. And I thinkthose markets are going to continue to be competitive, to the first part ofyour question. But, they are big markets. 70% of PPI market is still $12billion market to compete in and the statin market is going to continue to havea significant segment of use for branded products that are more effective inlowering LDL than generics. It won't be as big as it used to be, but that'sokay. We still need to be there to compete.

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

Paul Kenyon

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

Jo Walton - LehmanBrothers

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

Paul Kenyon

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

Jo Walton - LehmanBrothers

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 taxrate after removing restructuring cost and MedImmune related amortizationderives the core EPS number? And secondly, can you update us on what iscurrently happening relative to the AZLP valuation. And how is the accountingfirm factoring in the risk to Nexium, both from the commercial standpoint aswell as the patent risk. And relatedly, do you have a final answer from FDAregarding the claim of cardiovascular risk with Nexium? Thank you.

David Brennan

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

And the agency saw that, we did not see that there was aparticular issue left open that needed to be resolved. We have done someadditional work and we are going over it with them, but we don't have anyreason 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 thedata that we have. So, that there is no question in their mind either.

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

Paul Kenyon

The tax rate, we used to calculate in core EPS is the sameas 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, Iunderstand that's to be delivered early next year? And then, how was theaccounting firm going about assessing the risk in Nexium's commercial outlookas well as the patent, I assume they are gathering data from you in perspectiveor 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 thehorse there, Steve. The first activity related to the exit arrangements of 2008is the appraised value on the first option. So any valuation exercises thatwill be conducted ahead of the notice period in the early part of next year arearound valuing the net present value of the contingent payments on the old AstraMerck Incorporated products. So it's the (inaudible) and the only factor therein 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 relatedto the second option and that's not even triggered until two years after theexercise of the first option and that's still downstream. So there is nothingjust to report in terms of how any objectives third-party appraiser will tacklethat, but it's early on even begin to speculate, because it's an event that hasyet 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 towhat might be the outlook relative to Nexium and hence they might not bewilling to exercise the first option. So you can exercise the second, mightthey 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 SanfordBernstein. Please go ahead, sir.

Tim Anderson - Sanford Bernstein

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

Second question is on Crestor, and the FDA action datecoming up for your atherosclerosis claim from ASTEROID and METEOR, is itrealistic 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 firsthalf of '08 that has been the guidance. It just can't help but wonder if thatdrug gets delayed ultimately because of various potential safe issues includingimpact 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 acontinued price decline in the U.S.It has been just part of our strategy around a pricing and trying to gainshare. We are now focused on trying to gain share from our competitors in thebranded segment of the markets. So, I expect we will continue to see someerosion of price over time, as we have seen it.

On the atherosclerosis claim, the discussion is stillpending with the agency and we really don't comment on ongoing discussions. Sountil it's actually concluded and we see where it has ended up, I think thatwill impact then our opportunity to differentiate and promote. We think we havegot good data than what we filed and we believe that there is some benefit thatshould 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 NDAin the first half of next year. It's pending positive outcome from the ongoingPhase III trials, along with the risk benefit profile, including any adverseevents that are reported. So we don't have a particular reason that we areconcerned about beyond just making sure that, we've got the risk benefitbalance characterized properly through the program and it's viable, that's whatwe'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 ofAmerica.

Chris Schott - Bankof America

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

David Brennan

Okay. Well, I'll comment on the market growth and ask againfor a bit on the -- take a look at the mix shift, but I don't think there ismuch more to say around the Dual Eligibles. So, I think most of that happenedat the beginning of the last year and it's not impacting the business rightnow. All I ask Ed to take a quick look, while I am answering the firstquestion. I think the growth in the US market is slowing. I think IMSjust reported that they have lowered their outlook for overall growth.Yesterday, I believe they did their annual projection of what they areexpecting 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 theutilization of generics, especially in the two largest markets in the US hasexceeded what the assumptions were. So, I think that's part of it. There isadditional pressure in the co-pay areas. So, for some brands, I think maybecertain segments to the market get this proportionately affected. And I thinkthe Medicare Part D benefit provided a significant opportunity for growth, andat 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 areprobably seeing less aggressive pricing from a price increase perspective, aswell and there haven't been as many new products introduced.

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

Ed Seage

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

David Brennan

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

JonathanHunt

Yeah, it's moving along reasonably well. I think at the halfyear we were probably about 4,000 or 5,000 patients, moved out to about 7,000patients 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 - ABNAMRO

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

Secondly, I was just wondering going to back to otheroperating 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 thecase. And I wonder David you've been very kind in giving us a clear bridge interms of the cost between the reported EPS and the core EPS. Could youhighlight just what synergies in savings that's actually been achieved so far.

David Brennan

Very good. Well, let me start with the Mevacor. I believethat there is a role for potentially and over-the-counter product in thiscategory, if you are asking me that. That’s difficult to assess. I think ourview has been that the increased efficacy that has been seen with the productsthat have succeeded Mevacor. So, Merck introduced Zocor, Pravachol came out and Lipitor and finally Crestor. That theincremental benefit of lowering LDL, cholesterol and potentially the increasein HDL has absolutely demonstrated that there is a decrease in morbidity andmortality associated with using the more effective treatments. So, my view isthat 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 whohave mildly, slightly elevated cholesterol levels is something that committeeis going to have to coming on. But, we are operating in a different segment ofthat 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 thatguidance little bit, we will be probably rounding down to $0.5 billionexcluding MedImmune.

David Brennan

And on synergies, Paul, I haven't seen exactly how we havereported out on that other than to say we have the target for around $500million 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 bemainly '08 only.

Michael Leacock - ABNAMRO

Thank you very much.

David Brennan

Thanks Michael. Next question.

Operator

Our next question comes from Ms. [Louisa Hector] from LehmanBrothers. 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 thepositioning, so are we seeing Tier II here? And the same question really forSymbicort, I guess what percentage Tier II?

And then just a follow-up on Symbicort, you said you'recomfortable with the launch progress that $4 million in the quarter has beenquite low. Is this just a seasonal effect, is there sampling, that's [sort ofsecuring] the numbers or that perhaps formulate positioning that's holding yourback?

David Brennan

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

I think we have remained competitive price-wise and theformularies have in general been pleased to have another product in thiscategory because they recognized there is unmet medical need and that Symbicortis a good product. So we're not in anyway disadvantaged I think and we'recontinuing to get more acceptances.

There is a seasonality associated with it and as our launchstocking went in right at the end of the second quarter, we did not expect thatthere would be a big uptick in the third quarter because of the seasonality andthe fact that we were just getting launched. As I said, the metrics we arefollowing as used by allergists and by pulmonologists. We had seen as I said50% of allergists have used the product and we are getting uptick in some newpatients starts. So, all the things we follow are consistent with our launchplans.

For Seroquel XR, the formulary positioning has been relativelythe 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 mostorganization have accepted it as such. So again, I think we've got virtuallythe same kind of coverage with the XR now as we have with IR, plus or minus arevery little bit. So, it's positioned well.

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

Operator

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

Andrew Baum - MorganStanley

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

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

David Brennan

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

And there are number of steps that have been put in placeespecially in the manufacturing area, the transition periods tend to be slowerbecause of the regulatory requirements. As you know, there are a number ofregulatory issues that have to be resolved and then we have to be able todemonstrate that anybody that we would outsource anything to meets the samelevel and standard as is required by the regulations and our own standard atleast as good if not better than the regulations.

So I think we've been looking at this pretty aggressively. Weare looking from a supply chain perspective to maintain control of the patientfacing end of the supply chain. But we do see opportunities in the API area inthe early stage of chemistry to outsource some of it. And we would do some inother 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 havechallenged, Jonathan and I were talking about it, in 17 of the top 20 productshave been challenged. So this is obviously a strategy that's being followed bythe generics and this is a substance patent challenge. So, it's right at thecore of where we are -- very, very determined to demonstrate the validity ofour 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 willdeal with it the way we deal each case, tends to get its own weakness. And sowe will start to develop this one and see where it takes us, but we areconfident in our intellectual property and we are going to push hard on it,Andrew?

Andrew Baum - MorganStanley

Thank you.

Jonathan Hunt

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

Operator

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

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