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AstraZeneca PLC (NYSE:AZN)

Q2 2012 Earnings Call

July 26, 2012 7:00 am ET

Executives

Simon Jonathan Lowth - Interim Chief Executive Officer and Executive Director

Tony Zook - Chief Executive Officer and President

Julie Brown

Martin MacKay - President of R&D

Analysts

Gbola Amusa - UBS Investment Bank, Research Division

James D. Gordon - JP Morgan Chase & Co, Research Division

Peter Verdult - Morgan Stanley, Research Division

Tim Anderson - Sanford C. Bernstein & Co., LLC., Research Division

Brian Bourdot - Barclays Capital, Research Division

Seamus Fernandez - Leerink Swann LLC, Research Division

Mark Clark - Deutsche Bank AG, Research Division

Matthew Weston - Crédit Suisse AG, Research Division

Jeffrey Holford - Jefferies & Company, Inc., Research Division

Keyur Parekh - Goldman Sachs Group Inc., Research Division

Damien Conover - Morningstar Inc., Research Division

Naresh Chouhan - Liberum Capital Limited, Research Division

Steve Scala - Cowen and Company, LLC, Research Division

Simon Jonathan Lowth

Welcome, ladies and gentlemen, and thanks for joining our second quarter results conference call and webcast. After my brief opening remarks, you will hear from Tony Zook, Executive Vice President of Global Commercial Operations, followed by Julie Brown, Interim Chief Financial Officer. We're also joined by Martin Mackay, President of Research and Development, who will be here to participate in the Q&A session, and of course, members of the Investor Relations team as well.

Our second quarter and indeed our first half financial performance reflect a revenue profile that was expected given the loss of exclusivity of several key products, most notably Seroquel IR from March. Products with loss of exclusivity accounted for 15 percentage points of our 18% decline in second quarter revenue in constant currency terms.

In addition to the challenges from our specific portfolio due to generics, we continue to face the same difficult market conditions that the whole industry faces as the global economy struggles to return to sustainable growth. Government interventions in the marketplace continue to take their toll. We estimate the impact to AstraZeneca at around $300 million in the second quarter alone. The disposals of Astra Tech and Aptium created good value, albeit they also weigh on the year-on-year revenue comparisons.

And finally, in terms of revenue headwinds, we saw a continued impact on our business from the supply chain interruptions following the implementation of new IT systems in our plant in Sweden. Our best estimate of the impact in the second quarter is around 2% of revenue overall, but as you will have seen in the press release, supply issues reduced our growth rate in emerging markets from around 8% down to 1%. Production is now well ahead of normal levels and is responding to ongoing demand, including filling back orders and restoring normal inventories in the distribution channels. We estimate the revenue impact for the full year to be around 1%.

Despite the challenges, our commercial organization continues to drive performance for those brands where we retain market exclusivity and in geographic markets where we are investing for future growth. As you'll hear from Tony in a few moments, this has been a very resilient performance for Crestor in the face of a highly genericized statin market, particularly with the recent launches of generic atorvastatin in many markets.

There was also good growth within the diabetes and oncology portfolios. As for Brilinta, well, Brilique is gaining momentum in Europe, although it's fair to say that the ramp-up in the U.S. remains slow. In addition to ongoing discipline and managing our operating costs, the restructuring programs are delivering real benefits to improve our long-term competitiveness. Expenditures in research and development and SG&A are both lower in the quarter in constant currency terms, even after making the necessary investments in development projects to advance the pipeline and in support of new launches.

We've made further progress on the pipeline since Martin's conference update in February. And we received a positive recommendation by the CHMP in Europe for approval of FORXIGA, a first-in-class new diabetes medicine from our collaboration with Bristol-Myers Squibb. It's now being reviewed by the European Commission, which has final approval authority. We also received a positive CHMP recommendation for approval in Europe for Zinforo, a new intravenous cephalosporin antibiotic for the treatment of adult patients with complicated skin and soft tissue infections and community-acquired pneumonia. Here again, we await approval by the European Commission.

Across the entire pipeline, 22 projects have successfully progressed to the next phase of development, including 7 projects in the first human testing. Ten projects have been withdrawn.

Our portfolio has also been strengthened by a string of successful business development initiatives in the first half. A collaboration with Amgen on 5 clinical stage projects in inflammation, including brodalumab, which will enter Phase III before year end. We completed the acquisition of Ardea Biosciences, which adds lesinurad, a Phase III asset for the treatment of gout, to our portfolio. And then just this month, we announced an exciting expansion of our diabetes alliance with Bristol-Myers Squibb, which will add 2 important on-market products of diabetes, the GLP-1 analog's BYDUREON, once Bristol-Myers Squibb completes its acquisition of Amylin Pharmaceuticals.

As we strengthen the portfolio through externalization, we continue to deliver attractive cash returns to shareholders through our progressive dividends and share repurchases. We are determined to navigate through the market challenges we face with a relentless focus on execution. In the context of the first half performance and the outlook for the remainder of the year, we're maintaining our financial targets for the full year with core earnings per share in the range of $5.85 to $6.15.

So with that as an introduction, let me turn briefly to the headline numbers for the second quarter. Tony and Julie will provide more detail on revenue performance and the full profit and loss statement a bit later.

Revenues in the second quarter was nearly $6.7 billion, and that was down 18% in constant currency terms. And I've already mentioned the key drivers. Core operating profit was down 27% to $2.3 billion. And as you will hear from Julie, operating expenses are down in constant currency, but not enough to compensate for the revenue decline. Core earnings per share were $1.53 in the quarter. That's down 6%. As we noted on the front page of the press release, core EPS benefited from the release of a tax provision related to a cross-border transfer pricing issue. This amounted to $0.19 per share.

Adjustments to core earnings were slightly higher this quarter compared with the second quarter last year, so the decline in reported earnings per share is a bit more than for core. It's down 11% to $1.27. I won't spend any time on headline numbers for the first half other than to say revenue was down 15%. Core operating profit was down 23%, and core EPS was down 13%.

And with that, I'll turn over to Tony Zook, who will talk about the second quarter commercial performance for regions and for brands. Tony, over to you.

Tony Zook

Thank you, Simon. Before I get into the numbers, a few words on the overall commercial performance on the first half. Simon has already set out the framework.

While the global pharmaceutical industry continues to face challenging market conditions and as we tackle the particular challenges we face with our current portfolio, we remain focused on the things that we can truly influence, putting our commercial resources behind the brands that retain market exclusivity and continuing to invest in markets that offer attractive growth opportunities in the future. We create the headroom to make those investments by our restructuring and reshaping efforts. We're certainly looking to achieve a net reduction in spend, but we are absolutely focused on preserving our commercial capabilities and capacity to drive performance where we can make a difference. That means reducing noncustomer-facing positions, and consolidation of our regional headquarter structure is a key component of that. In fact, around 40% of the headcount reduction in sales and marketing related to our previously announced restructuring program will be in noncustomer-facing positions. We are evolving the size and deployment of our field force to match the evolving product portfolio with a general move towards reductions into more mature, developed markets while investing in emerging markets. Where we reduce our sales force, we're building up our headcount in new channels like service teams and call centers. Along with digital, with these new channels, we're maintaining, and in some cases, increasing market share for our brands at a lower cost than the traditional sales-rep-only model.

So with that as context, let me walk you through the second quarter revenue performance using constant currency growth rates, looking first at revenue on a regional basis. As Simon said in the opening, global revenue was down 18%. Loss of exclusivity is the main driver with disposals and supply issues also playing a role. Revenue in the U.S. was down 29% in the second quarter with generic competition for Seroquel IR accounting for 80% of the decline. There was good growth for Symbicort, ONGLYZA and FASLODEX, but this was offset by the disposals of Astra Tech and Aptium. Revenue in Western Europe was down 20%. In addition to Seroquel IR, generic competition for Nexium, Arimidex and Merrem were also important contributors to the decline in revenue. Revenue in the Established Rest of World was down 12%, chiefly on the 30% decline in Canada.

In addition to generic competition for Atacand, generics for Crestor entered the Canadian market in April pursuant to the previously disclosed settlement of patent litigation. Revenue in Japan was down 2%, this being a year in the biannual price reduction cycle. It's also important to keep in mind that when we look at our performance in Japan for many of our key brands, Crestor, Symbicort, Seroquel, and most recently, Nexium, we record revenue bases on shipments to our marketing partners. So the numbers in any given quarter often reflect ordering patterns and inventory movement as opposed to underlying demand where we're seeing good performance for Crestor and Symbicort, for example.

Revenue in emerging markets was up 1% in the second quarter. Two markets in particular are putting a damper on our performance: Brazil, where we had a loss of exclusivity for Seroquel IR and Crestor; and Mexico, where the macroeconomic conditions are making performance difficult, particularly for the kinds of products in our portfolio at the moment.

Revenue in China grew by 12%. The supply issues have made the biggest impact in emerging markets. If you adjust for this, revenue growth would have been around 8%. We're expecting a rebound in emerging markets performance in the second half, but achieving double-digit growth for the full year is now unlikely.

Looking at brand revenue. You can see the mixed picture with some good performances in brands that retain exclusivity. And by and large, I would count Crestor in that category, although as you can see, the loss of exclusivity in Canada and Brazil account for the small decline in revenue in the quarter. The growth in Symbicort was largely from a strong U.S. performance, where sales were up over 20%. The oncology products, IRESSA and FASLODEX both grew strongly, as did ONGLYZA. And Brilinta/Brilique is starting to make a contribution to growth as well. At the bottom, of course, is the significant drag on revenues from those brands most affected by loss of exclusivity, in particular, Seroquel IR.

I'm going to look at a few of these brandies in more detail, starting with Crestor. Crestor sales were down 5% in the quarter, largely due to the loss of exclusivity in Canada and Brazil. Sales in the U.S. were down 1%. Crestor total prescriptions in the U.S. are still growing ahead of the statin market, and the performance has been quite stable in the face of generic atorvastatin. As we have mentioned many times, 94% of Crestor volumes come from continued therapy, which we expect it would remain stable, and that's been the case. We've also seen a stable trend in net dynamic volume. That is new starts and switches to Crestor minus switches from Crestor. And that's holding steady even since the launch of multisource atorvastatin products at end of May. We're also seeing a steady improvement in the volume of patients switching from Crestor since the initial bump from the atorvastatin launch. We've taken a decision that we will not pursue many state Medicaid contracts for the price point required is not justifiable on sound business grounds. So we may see a slight reduction in TRX volumes in the second half, but the revenue impact will be even smaller. We're seeing that same resilient performance in Rest of World markets where, except for Canada's sales, were up 1%. And that's not by accident. It's the result of considerable work to position Crestor in the market as the preferred statin for patients to increase cardiovascular risk, a position that has helped support usage of the product in a highly genericized statin market. Crestor continues to grow well ahead of the market in Japan, although that's not reflected in the 4% x factory sales growth in the quarter.

Turning to Seroquel IR, which can be summed up in one word, generics. Sales in the U.S. were down 86%. On this chart, we showed 2 recent generic launches in the U.S. CNS market, Seroquel IR and the antidepressant Escitalopram. As you can see here how rapidly brands now erode in the U.S. market once generics enter. This is specially the case like ours when there's not a 100 day exclusivity that limits the number of generic players. Seroquel IR sales in the Rest of World were down 39%, again typical of the pattern where erosion is not as fast and as deep in the U.S. market.

It's a much better picture for Seroquel XR. Worldwide sales were off just 1% in the quarter. Sales in the U.S. were down 4% where the atypical antipsychotic market has also turned x growth in prescription terms. Seroquel XR market share took up a bit of a hit in April, down 17 basis points in the first full month of generic Seroquel IR, but has stabilized in May and June. We continue to believe that Seroquel XR will remain an important treatment choice and that we should be able to grow revenues alongside a generic quetiapine IR.

Seroquel XR sales in Rest of World were up 3% in the quarter. Western Europe was down 6%, where we've had a generic launch in the U.K. and an at-risk launch in Germany. The launch in France is off to a strong start. Sales in emerging markets were up 40% in the quarter.

Symbicort sales were up 3% in the second quarter on the back of a strong performance in the U.S., where sales were up 21%. In the U.S., Symbicort total prescriptions increased by 12% compared with 1% for the fixed combination market. Symbicort's share of new prescriptions is up a full point since December to 22.5% in June, and share of new patients is at 27.2%. Symbicort sales in the Rest of World were down 3%.

Turning now to Brilinta. I'll come to the U.S. performance in just a moment. But first, in Europe, the big news since the first quarter is that we have now successfully secured pricing approvals in Germany and most recently in France where we have now launched. We continue to generate a strong performance in Germany. We have good uptake in Nordic markets, and we're off to a good start in our launch in Italy. And I'm going to go through a couple of slides to illustrate each of these points. In Germany, we are maintaining our #1 market share for oral antiplatelet therapy for ACS patients in hospitals where we're on protocol, which is now at 85% of our target hospitals. And now we're starting to see this presence in the hospital drive retail utilization, where we've grown to 8.5% market share in the dynamic OAP market, now second to clopidogrel. In the Nordic markets, we've also taken over the #2 position in volume market share in the oral antiplatelet therapy market. The launch in Italy is also up off to a strong start where in just 6 months, we're joint second with the prasugrel in terms of share of ACS therapy for patients in hospitals where we're on formulary.

Turning to the U.S. You can see on this slide the progress is slow but steady on all key indicators: formulary acceptance, protocol adoption in trial by interventional cardiologists. We're slowly establishing reimbursement on Medicare Part D plans, all of this translating into a steady build in total prescriptions. We're also pleased to see Brilinta receive a strong Class I recommendation in the recent guidelines updated by the ACC and AHA. On balance, I think it's fair to say that as the third brand into the market and having to contend with generic clopidogrel, we're finding that penetrating the U.S. hospital market has been a real challenge. However, we remain confident that we can establish Brilinta's value in the world's largest market.

ONGLYZA had another strong quarter with alliance revenues up 72%. Revenue in the U.S. was $58 million. And as you can see on this next slide, the combined market shares for ONGLYZA and KOMBIGLYZE XR are well up from a year ago in the DPP4 market that's growing at 24%. ONGLYZA revenue in Rest of World was up 62% to $21 million.

Finally, a quick snapshot for 2 of our oncology products that are now at a run rate that will annualize at $600 million each. FASLODEX sales were up 24% in the quarter on continued penetration of the 500-milligram dosage form but also from expanded use. We also saw good growth from IRESSA where sales were up 13%.

I'll now hand over to Julie Brown, who will review the second quarter P&L. Julie?

Julie Brown

Thank you, Tony. I will cover the core P&L for the second quarter with an emphasis on the key drivers of operating profit and margin. I will briefly touch on restructuring. I'll comment on our cash performance and cash distributions to shareholders. And finally, I will close with our thoughts on guidance for the full year.

I will now turn to the second quarter P&L. I will focus here on core margins and profit. The press release does, of course, contain the statutory numbers and a detailed reconciliation to the core measures. When I refer to growth rates, they will all be on a constant currency basis. Revenue was $6.7 billion. Core gross margin in the quarter was 79.9% of sales. That is down 190 basis points compared with the second quarter last year, largely due to a change in product mix following the loss of exclusivity on key brands. Core SG&A expense was down 18% compared with the second quarter last year. We continue to exercise discipline in managing these costs and see meaningful benefits from restructuring being realized whilst, at the same time, creating headroom to support our new product launches.

The absence of Astra Tech also contributed to the lower SG&A in the quarter. The excise tax component of U.S. health care reform amounted to 2.8% of the SG&A expense in the quarter. Core other income of $182 million was unchanged compared with the second quarter last year. There were some moving parts. Royalty income from Entocort in the U.S. was lower following generic entry, but it was largely offset by income from the Zomig marketing agreement with Impax Laboratories in the U.S. That leads to a core pre-R&D operating margin of 49.9% of revenue, down 190 basis points compared to the second quarter last year on lower revenue and gross margin.

Core R&D investment in the quarter was just under $1.1 billion. That is 4% lower than last year. Benefits from restructuring have more than offset increased spend on projects to progress our pipeline, including the additional projects from the Amgen collaboration. For the full year, I expect core R&D expense will be lower than last year in constant currency terms, both on an overall basis and if you exclude the impact from intangible impairments from both periods. This leads to a core operating profit of $2.3 billion in the quarter, 27% lower than last year. And core operating margin was 34.1% of revenue, down 430 basis points.

Turning to our productivity program. In the second half, we have charged $907 million of the projected $2.1 billion total cost for Phase III of restructuring with the split between cost of goods, R&D and SG&A as laid out in the table. We still expect most of the restructuring costs associated with the program we announced back in February will be taken in 2012. And we remain on track for delivering the estimated $1.6 billion in annual benefits by the end of 2014. Cash generated from operating activities in the first half was $2.8 billion, in line with last year. With disciplined management in working capital and lower tax spend, we were able to offset the lower operating profit and contributions to the pension fund.

In terms of cash distribution to shareholders, we maintain our commitment to our progressive dividend policy. The board has recommended a first interim dividend of $0.90. And as you will recall, the aim is to set the first interim at around 1/3 of the full year dividend for the prior year, which in 2011 was $2.80 per share. Subject to market conditions and business needs, the target for our net share repurchases in 2012 remains $4.5 billion. We completed gross repurchases of $1.9 billion in the first half and issued $0.3 billion in consideration of share option exercises, giving a net figure of a $1.6 billion.

In terms of the cash profile for the second half, we have the pending Amylin payments, approximately $3.4 billion to expand the collaboration, subject to a final true-up, plus a further $135 million relating to the option to establish eco-governance rights under the key strategic and financial decisions regarding the collaboration. We will also be paying the first interim dividend in September.

The other potential call on cash this year was the Merck shares option, or the second option as it is also called. We've reached an agreement with Merck to amend certain provisions related to the second option and now intend to exercise the option in 2014, barring unforeseen circumstances. We have agreed on the valuation methodology and the option exercise price, which will now be around $407 million, representing $327 million for the PPI products, subject to a true-up and around $80 million for the profit allocation in the partnership. The expected payments to Merck will be capitalized and amortized as set out in Note 5 of our second quarter financial statements.

One other accounting item to note. With effect from the first of January 2013, we are updating our definition of core financial measures to exclude all amortization charges and intangible asset impairments. The new definition will provide better clarity on the impact from amortization and impairment charges, which are included in our core results under our current definition. In addition, it will aid comparability of our results versus the peer group. We will publish an update on this with our third quarter and 9-month results.

Finally, turning to guidance. We knew that 2012 was going to be a challenging year in revenue terms, particularly with the loss of exclusivity on several products, most notably Seroquel IR. We expect government interventions on pricing to continue at the upper bounds of what we anticipated, both in Europe and in the U.S. We continue to vigorously defend our intellectual property. We prevailed in the U.S. trial on the Seroquel XR patent, and we've also had positive outcomes in Spain and in the Netherlands. But we've also had an adverse judgment in the U.K. and some at-risk launches in Europe. There are rulings pending in other jurisdictions.

On balance, our revenue assumptions are unchanged. We expect a decline in revenue for the full year to be in the range of low to mid-teens in constant currency terms, including any residual impact from supply issues. The other items of guidance are also unchanged with the exception of tax. With the tax benefit realized in the second quarter, we now expect the effective tax rate for the full year to be around 20%. That is 2 points lower than our previous guidance. As we mentioned in the press release, we did have a probability-weighted view of the likely realization of this benefit when we revised our guidance at the first quarter results. And this, taken together with the diluted impact of the expansion of the diabetes alliance with BMS, means our core EPS target for the full year remains unchanged in the range of $5.85 and $6.15. Whilst currency was negative to core EPS in the first half compared with last year, it was broadly neutral versus our guidance, which was based on the January 2012 average exchange rates. Our forward look to guidance takes no account of the likelihood that average exchange rates for the remainder of the year may differ materially from the January 2012 average.

In summary, our revenue performance reflects many of the expected challenges that we provided the framework for our guidance update in the first quarter. We are seeing the benefits of disciplined cost management. Our restructuring programs are delivering real benefits through lower R&D and G&A costs that helped provide the headroom for the investments in our business development, our pipeline and new launches. We continue to focus on shareholder returns with our progressive dividend policy and share repurchases.

And I will now hand back to Simon, who will chair the Q&A session.

Question-and-Answer Session

Simon Jonathan Lowth

Well, thank you, Julie and Tony. [Operator Instructions] So with that introduction, can we have the first question, please?

I think the first question is going to come from Gbola Amusa at UBS.

Gbola Amusa - UBS Investment Bank, Research Division

I have 2 on products. On Brilinta, first of all, we are seeing some progress on your prescription trends in Europe. But we see the phrasing on formulary target hospitals, et cetera. Would you be able to comment on what percentage of overall demand, the slides you show in Germany, Nordic and Italy, respectively, what percentage of the market that actually is you're showing? And then on cholesterol and Crestor, ATP IV on guidance are still long overdue. Do you have any further insights on what the holdup is exactly and when you think they may finally emerge and whether ATP IV could have the effect on the market and on Crestor that we saw with ATP III and ATP II?

Simon Jonathan Lowth

I mean, on Brilinta, I'll ask Tony to comment. I mean, this is a very important medicine. We continue to have real confidence in Brilinta's ability to bring real benefit to patients. We're pleased with the progress that we're making in Europe and other markets around the world. As Tony said, we'd love to be getting Brilinta to more patients more swiftly in the U.S., but we feel we're working steadily through the process of gaining -- getting on to formulary protocol and building trial. But Tony, do you want to try and tackle the question of overall demand?

Tony Zook

Sure would. As you probably know, if you look to the incident rates in Germany, it's about 360,000 incidents in a given year. If we look to our protocol inclusion on the hospitals, in Italy, for example, we're on 85% of the top -- or targeting 85% of the top 1,000 hospitals. Likewise, in Germany, it's a very high percentage of the hospital base. And so we're very pleased with the progress that we continue to make. You also saw that for the first time in these markets, we are now seeing that that hospital performance is also beginning to be pulled through into the dynamic share as well. So while lower, nonetheless, it's still continuing to show solid progress. And now we have passed the second entrant and are now going head-to-head with clopidogrel.

Simon Jonathan Lowth

Well, then, Tony, thanks for that. Martin, do you want to comment on Crestor and cholesterol guidance?

Martin MacKay

Yes. Very briefly, just to say that we are not actually part of the update process, which is carried out by the committee. And as you know, these are nominated by the National Heart, Lung and Blood Institute. What I would say is previous updates also, as you know, have made target levels more aggressive. But we do expect to see full guidelines at the second half of 2012.

Simon Jonathan Lowth

Martin, thanks very much indeed.

Gbola Amusa - UBS Investment Bank, Research Division

Well, perhaps U.K., when those guidelines are anticipated. I know you're not involved there as well, but we have The Lancet making some fairly bullish statements about how cholesterol drugs should be used. Do you think that might be influential in, let's say, when the U.K. guidelines when they come?

Martin MacKay

You would think so. You would think it would be influential. But until we see both sets of guidelines, really, it's just a little premature to comment. And as I said, the way that targets have gone over the years was certainly deemed to be more aggressive, and one could speculate on that. But I would say, let's wait to see the guidelines.

Simon Jonathan Lowth

Thanks for that. I mean, clearly, I think Martin's final comment was an important one. We do see in many markets, when new guidelines come out, they tend to be more demanding in standards. And that, of course, is something that provides benefit for Crestor, which I think has got a strong evidence base. But it's the treatment of choice for the high-risk patients looking to get their cholesterol into target. And so we obviously watch what lays behind your question, that the guidelines with great deal of closeness.

Now let me move to Alexandra Hauber now, number two. Alexandra?

James D. Gordon - JP Morgan Chase & Co, Research Division

It's actually James Gordon from JPMorgan standing in for Alexandra. One question was just on the supply chain disruption. In the release today, you say the impact on the top line for the full year will be around 1%, which I think would be around $300 million. So the question would be, how much is actually left presumably to fall into Q3? As we've seen, I think you had about $70 million in Q1, and then in Q2, about $100 million in emerging markets and also in Eastern Europe. So the first question, how much is left for Q3? And also maybe how would that split between Europe and emerging markets? And also, just squeezing a second question in, Western Europe declined about 20%, and you said half of that was the big 4 genericization. So of the other 10%, how much of that is genericization versus price cuts or other issues?

Simon Jonathan Lowth

Great. Well, James, thanks for the questions. Let me deal with the first question on the supply chain interruption. And Tony, if I may, can I ask you to pick up the dynamics in Europe? So on the supply chain, we did indeed, as we trailed at the first quarter, we experienced the interruption to production really towards the end of the first quarter into the beginning of the second quarter. We anticipated that the sort of $60 million or so impact that we'd had in the first quarter would be increased in the second quarter. And that's exactly what you've seen. As the sort of second quarter progressed, we were able to largely resolve issues, significantly ramp up production. As I said in my remarks, we're now operating well above usual run rates. So we're now responding to ongoing demand, and we're also replenishing inventories in the supply chain. The dynamic now, James, is there will be some back orders, which impacted our sales in the first quarter. We'll be meeting those, but there may be some additional loss sales, actually, in the marketplace. And hence, we've guided to a 1% impact for the overall year. And that then allows for a range of sensitivities from here. But I think that guidance for you at 1%, the right sort of benchmark we have in mind. Let me turn to Tony on Europe. And obviously, we talked about loss of generics, Tony, in your remarks. It is an environment of pricing. You want to elaborate on that?

Tony Zook

Sure, James. You are right. A big part of it was the volume pressures that we felt with the introduction of generics. But as you rightfully say, the pricing pressures in Europe are quite intense. When we came into the year, we believe that the pricing impact would be in the range of mid-single digits, low to mid-single digits. And the pricing impact that we've seen has certainly been at the upper end of that range, and in some countries, it's actually exceeded it. Within Europe, the Southern European markets have been hit probably the hardest. We see countries like Spain, Italy and Greece that have exceeded that limit. And so the pricing pressures do play a component, as you have suggested.

Simon Jonathan Lowth

Tony, thanks for that. I think the other factor is whilst there's been probably a disproportionate impact of the supply chain interruption and the first half was in the emerging markets, it's fair to say that some markets in Europe have been impacted. Having said that, I think within Europe, we've seen strong performances from drugs like Crestor, from Brilinta, as Tony mentioned, from ONGLYZA. So whilst we've got a challenging environment here, we also continue to be encouraged by the performance we're making where we've got brands with exclusivity.

Let me turn to, I think, Peter Verdult, Morgan Stanley. Peter?

Peter Verdult - Morgan Stanley, Research Division

Peter Verdult here, Morgan Stanley. A couple of questions around product and accounting. Just on Crestor, I mean, clearly, trends are going well at the moment. You made some comments in the presentation about how your confidence is high that will remain in 2012. I just want to look into 2013 a bit. I mean, just sort of kind of a sense as to how confident you are that you can maintain this Tier 2 access that you currently enjoy. And then a quick account on products for Martin. Just with cangrelor [ph] now filed in the U.S., I just wanted to see if there's anything, any update you can give in terms of path to market for dapa in the U.S. And then just quickly shifting to accounting. On the tax rate, the guidance implies a big jump in H2. Now given the profit loss in U.S., I was quite surprised by that. So just maybe a few comments about the mix and what's going on there. And then as it relates to your new reporting, which will exclude amortization, I saw with that data that basically, the allocation of the purchase price to goodwill was minimal. I was just wondering, on the $3.5 billion that you're spending on Amylin, should we expect a similar treatment will eventually go on the intangibles, which you will then be amortizing?

Simon Jonathan Lowth

Peter, thanks for that. My interim CFO tells me, and she's fairly astute with the numbers, tells me that was actually 4 questions, Peter, rather than 2. But nevertheless, we will respond to them because they're all good questions. So let me ask -- can I suggest -- Tony, would you like to pick up Crestor and sort of looking into 2013. Martin, if you could then pick up SGLT2, dapa, FORXIGA. And then we'll tackle -- Julie will tackle accounting items. Yes?

Tony Zook

Sure. Thanks for the question Peter. As you said, Crestor has been fairly resilient in the U.S. marketplace where we have seen, as I mentioned before, that high stability factor with the patients that are already on product, and even the net dynamics have moved in a positive direction. So we are confident in our ability to retain our positioning as the statin for that patient at higher risk. Relative to our contracting status, as you said, we've enjoyed fairly healthy open status and Tier 2 status. We don't anticipate any significant trend differences moving forward relative to our Tier 2 status. In fact, many of the contracts are in place not just for the second half but already for 2013. So in a broad sense, we expect still very good access for Crestor in the Tier 2 marketplaces. The only place where you may start to see a subtle shift in our contracting strategies, I mentioned before, there are just certain very, very small segments to the business, the state Medicaid population that, for us, simply aren't worth pursuing from a contractual basis. But the broad commercial platform, we believe, is quite sustainable going into 2013.

Simon Jonathan Lowth

Tony, thanks. Martin, to you for dapa, FORXIGA, SGLT2, please.

Martin MacKay

Thank you, Simon, and thank you for the question, Peter. Not really much more to report on the U.S. As you know, the FDA are requesting more data to get a better assessment of the benefit risk. It's not crystal clear the way forward to the minute. We're working very closely with our partners Bristol-Myers Squibb and with the FDA to define that way forward. We're still confident about the molecule and our ability to get it approved. Of course, just a comment on Europe, more positive news there in terms of their positive opinion from the CHMP. And we're looking forward to the EC decision in due course.

Simon Jonathan Lowth

Martin, thanks very much. Julie, let me turn to you on the tax issue. Let me just comment on Amylin. And rightly, Peter, as we showed, the majority of the Ardea consideration went to intangible assets, and that just reflects the value we see in the medicines, and in that case, projects that we were acquiring. The accounting for Amylin, we'll obviously disclose when that transaction is completed by our partner Bristol-Myers Squibb and the collaboration starts. I'm not going to prejudge that, but I think it's fair to say that we see significant value in the products, and therefore, expect that it will be predominantly in intangible assets. But we'll see. We'll disclose that fully at the time. Julie, over to you on the tax rate.

Julie Brown

Okay. Thanks, Peter, for the question. With regard to the tax rate, we're expecting the second half to return to more normal levels for the group tax rate. So on the core basis, about 24%; on a reported basis, about 25%. Obviously, we have trade inflows running between 100 countries across the group. And therefore, we will have a number of tax audits open at any one time. And clearly, the settlement that we received in the second quarter causes us to have a very low tax rate in the second quarter of 8% on a reported basis and 10% on a core basis. But basically, in the second half, we expect to return to more normal levels of tax. Thanks, Simon.

Simon Jonathan Lowth

Julie, thanks for that. Tim Anderson, Sanford Bernstein. Tim?

Tim Anderson - Sanford C. Bernstein & Co., LLC., Research Division

Can you quantify the likely dilution from the Amylin in 2012? I'm trying to put that into the context of the tax benefit as you're saying will be an offset. And then on respiratory, Symbicort is a big product, but it's at the tail end of its life cycle. I'm kind of surprised you don't have more late-stage offerings in your respiratory pipeline. You show variety of assets in Phase I or Phase II. But is there really much you can do at this point to improve upon existing therapies or to fend off competition? And on that same topic, can you update us on when you think generic versions of Symbicort could potentially launch in Europe or other parts of the world?

Simon Jonathan Lowth

Okay. Well, Tim, thanks for that. Martin, can I ask you to address the question on respiratory franchise? And Tony, if I may, any update or any inside perspective you want to share on the potential for generics in that marketplace? And then we'll come back and talk about the Amylin earnings impact. Martin?

Martin MacKay

Yes. Thank you, Simon. And thank you for your question. Tim. I'd make a couple of comments. First up, to say that we believe Symbicort still got a long runway. It's terrific combination there and doing very well, as Tony described. And we believe will continue to do well. You're absolutely right, Tim, in terms of our respiratory portfolio. It's an earlier portfolio, involves both large molecules from our MedImmune R&D laboratories and small molecules also from our Mundal [ph] facility. Clearly, we would like some late-stage products. And as in other areas where there's high unmet medical need and breaking science, we're looking for partnerships in that area, and we'll continue to do so over the next period.

Simon Jonathan Lowth

Thanks, Martin. Tony, in Symbicort, potential generic alternatives?

Tony Zook

Yes. As Martin suggested, I think it's important to recognize that Symbicort has performed extremely well in a number of our markets around the world, not just in the U.S. We're seeing phenomenal performance in Japan, where it's over a 35 market share. We're seeing great uptake in a number of markets. So I just want to put that in context. But specific to your question, we're aware that a first EU submission of budesonide/formoterol product was made in April. And for us, it wouldn't be appropriate to speculate as to the time of approval of that product. But I would also just like to remind us that the Turbuhaler device contains patent protection in 2019. So oftentimes, when we see the potential for a product to come into the marketplace, we still believe that there's an opportunity for us to differentiate versus those brands and retain a sizable percentage of our business.

Simon Jonathan Lowth

Tony, thanks for that. Julie, Amylin amortization?

Julie Brown

Yes, sure. Thank you for the question. The expansion of our collaboration with BMS will result in a dilution in 2012 and 2013 earnings. And after amortization, this will be in the range high single digits to low double digits per share. The corresponding pre-amortization amount, if we exclude the amortization charge, will be in the low single digits per share. And both measures become accretive from 2014, and we expect meaningful accretion to occur thereafter.

Simon Jonathan Lowth

Thanks, Julie. We've got a question that was -- came in on the WebEx from Paul Major, Redburn. Paul's question was that, I mean, observation that core SG&A spend has been low and reduced through the first half. But Paul's question was, how sustainable is this trend and to what extent is it being driven by the faster-than-expected realization of the benefits from the ongoing restructuring program? Would we comment on the relative level of underlying SG&A we might expect in 2013 compared to the 2011 base? Tony, you've touched on some of this in your remarks. But I don't know if you'd like to address Paul's question for us.

Tony Zook

Certainly, Simon, I would be happy to go into more of the sales and marketing component and then round out as you see fit on the other pieces. What I would say, first and foremost, Paul, as we went through our restructuring across the commercial organization, and the first thing we want to do was minimize disruption at the country level and try to mitigate impacted customer-facing roles. So our initial focus and energy went into the above country, infrastructures that we thought that we could improve upon and make more efficient. That translated into moving from 5 regions to 3. It meant that we were moving from having our commercial resources, again above country, from 7 sites to 3. We also were taking a hard look at our overall selling forces. And we have seen a flow of our selling forces. And we take a hard look at that, as you might imagine, not just every year but every month. And we want to make sure that where there is opportunity for growth, that we continue to resource appropriately at the level needed. But as our portfolio evolves, so does then our mix and shift of our selling resources. So you've seen a gradual trend moving away from the developed markets in total sales force size in favor of where there is significant growth opportunities in the emerging market sizes. Where we have reduced our selling forces even in some of the established markets, we've augmented that with some of our new channel work that we've talked about in the past, and what we have seen now is great examples where these new selling channels are augmenting our share voice, and in many cases, actually improving our share performance but at a lower cost. And so our overall sales and marketing ratios, we would say, are more than industry competitive. We continue to find ways to improve upon those, but we're not shy about investing where we see opportunity. And so it will change in flux as does the opportunities in the portfolio.

Simon Jonathan Lowth

And Tony, let me just -- I'm going to make a couple of quick ones on G&A. And I think Martin started talking a bit about the progress of sort of restructuring productivity in research and development. But quickly, Paul, on G&A, I mean, the big areas of G&A are in IT, finance, HR, and to some extent, just the facilities and the infrastructure. And on those components, remember G&A can be 1/3 or more of the SG&A. And what we're engaged in here is a program of bringing those support activities into essentially regional service centers, investing hard in IT to improve those efficiencies, where I think midway, perhaps more than midway, through that process, and that's continuing to help us to lower the G&A cost. And of course, we're also absorbing through that SG&A line, for example, the excise fee in the U.S. So the underlying reductions are somewhat stronger. But the key point to make, and Tony made it is, the focus is on above market activity. It's on the enabling self-support activity, the back offices, if you like. And where we see opportunities to invest in the front line to drive growth, we will be doing that. That's on SG&A. Martin, quickly on research and development and progress there.

Martin MacKay

Yes, very quickly, Simon and Paul. As you know, we embarked on some significant change in research and development starting in 2010. Now if I could just give one example of that which highlights this in 2010. We had 21 R&D sites. By the end of this year, we'll have 10. These site closures were made in 2 waves. And really, to get to the heart of your question, the second wave has been rapid. We've moved through that very quickly, allowing us to realize the benefits. I would say 2 really important things about the speed that we moved. First of all, we did it with the greatest respect for colleagues in AstraZeneca that have left the company over this time. And secondly and also very importantly, we haven't missed a beat in terms of the portfolio. So we continue to progress the late-stage, the mid-stage and the early-stage programs at speed and that we made the real point of making sure that we were able to do that through the significant change.

Simon Jonathan Lowth

Martin, thanks for that. And Paul, I know we extended beyond SG&A, but I think it's important that you will understand just the pace with which we're moving but the way in which we're doing it to protect the portfolio. Now let me come back to the lines. I think we've got a question from Brian Bourdot, Brian at Barclays.

Brian Bourdot - Barclays Capital, Research Division

On Brilinta, Tony, it was interesting that you chose to describe it as a third to market antiplatelet in the U.S. Just wondering if that's how we should think about the market, the hospital-initiated drugs these days, driven more by cost considerations rather than things like mortality benefits because they'll perhaps fight tooth and nail to save costs. And just wondering if you could give us any idea of the number of patients on therapy in that market that are reimbursed.

Simon Jonathan Lowth

Great. Brian, look, thanks for the question. And Tony, over to you on Brilinta. It's an interesting question about the dynamics in this market.

Tony Zook

Yes. Brian, I think when I conveyed that it's third to market, it just is an additional challenge and hurdle to overcome. We're not saying that it's not going to happen. We're just being realistic that when you come third to market entrant, there are added hurdles of going through the formulary and protocol process that are involved. And so we recognize that. We're continuing to push hard. We're optimistic about the value that Brilinta will bring patients in the U.S. marketplace. As you've seen, we've made steady progress on the key indicators that we are continuing to drive, and we're looking forward to seeing greater uptake of the brand. But when I used the third to market entrant, I was just trying to explain that it does pose additional challenges for us in the marketplace. Clearly, the mortality benefit is still the dominant driving force, and we believe that will be the differentiator for the brand over time. In the short-term, of course, the cost matters to formulary and protocol teams, but we believe the long-term value that that's the key differentiator for this brand.

Simon Jonathan Lowth

Okay. Well, Damien, thanks for the question. I mean, I guess it's also fair to say that we're investing already in quite extensive life cycle management around the brand, Brian. Martin, do you want to just touch briefly on the life cycle management program for Brilinta?

Martin MacKay

Just very briefly. We have the PEGASUS study, which is over 20,000 patients. And we also have the EUCLID study, known peripheral arterial disease. So we really believe in the molecule and we believe we can build that to life cycle management as described.

Simon Jonathan Lowth

Great. Okay. Martin, well, thanks very much indeed. Sorry, Tony had a...

Tony Zook

Well, I'm sorry, I didn't address the other part of your question. I won't go into the total numbers that we are covering within the U.S. though I mentioned that our overall reimbursement unrestricted access is at 66%, which is up 8% quarter-on-quarter. Where we need to continue to drive improvement is in the unrestricted Part D segment of the marketplace. Today we're at 34%, which is up 25% from where we're a quarter ago. But we know that's still an area for us to improve, especially as we want to pull the product through into the retail setting.

Simon Jonathan Lowth

Great. Okay. Tony, thanks. Again to the lines, we've got a question from Seamus Fernandez at Leerink Swann. Seamus?

Seamus Fernandez - Leerink Swann LLC, Research Division

So Martin, having -- maybe one question for Simon and one for Martin. Simon, in your interactions with the board, can you just kind of update us a little bit with regard to what you see as the greatest needs for the business in the next 6 months and then perhaps over the next sort of 5 to 7 years if you can possibly go that far out? And then, Martin, in some recent meetings with the Chairman, people had mentioned and moved towards more of an open-source type platform. Can you just talk to us about what your vision is for what that open-source type platform might actually be and how that evolves going forward?

Simon Jonathan Lowth

Great. Well, thanks for those questions, Seamus. So let me focus on -- I mean, you rephrased it as greatest needs. Let me term it as priorities opportunities for our company. In the near term then, I think nominees are very clear, and you probably will know what they are, we've got some great brands in the marketplace. We've got very strong positions in a number of geographies around the world, and we continue to create the headroom and put investment in order to drive growth where we put exclusivity, where we've got growth in the marketplace. And that is priority #1. And we are very focused on that across the business, and we meet on a very regular basis to test and probe and understand where we can put more investment work to drive our current portfolio. Second priority is progressing the pipeline and strengthening the product portfolio. And in research and development, pretty much any way you go in any of our sites, you will find 4 crystal clear priorities that the research and development organization are working on. It's progressing the late phase. It's bringing through the proof of concepts. It's conducting the life cycle management programs. And it's supporting our business development agenda, which brings me to the other component, which is pursuit of our business development agenda. We're pleased with the 3 more significant deals that we've done in the first half of this year with Ardea and Amgen and Amylin. We talked about those on this call. But there's a whole host of business developments and collaboration going on across research and development, which Martin will address in a moment. So that's priority #2, strengthening the pipeline, strengthening our market portfolio. And the third priority is ensuring that we continue to maintain our position we feel as one of the more efficient and productive peers in our sector because we need to maintain the margins from delivering that brand portfolio in order to fund that reinvestment while continuing to provide good returns to our shareholders. So 3 pretty clear priorities, honestly, Seamus: Sell the products, get more at the right price and maintain productive to get returns to our shareholders. Looking beyond that, those 3 priorities will certainly govern everything we're doing. But I think when you look longer term, clearly then, we're starting to think about the evolving shape of the pharmaceutical marketplace and where we need to continue to further strengthen our commercial position, our product portfolio in order to ensure we're very well positioned for the rate of continued strong fundamental growth we see in some markets. And that could start to look at where we're doing research and development in Asia. You can look at expanding our product portfolios. As you know, we have made earliest strides on this in BGx. The other longer-term priorities, Martin will touch on this now, is driving that earlier portfolio, making certain that we're really positioned in terms of discovering early development in those areas of unmet need and breaking signs that will drive the future. And that probably is a good handover for you, Martin, to talk about, I think, what [indiscernible] described as an open architecture, I think, Seamus was describing.

Martin MacKay

Yes, thank you, Simon. And thank you for the question. I'd love to spend some quality time with you, Seamus, to go through this in some detail. But in the interest of time, let me just hit the high points of how I see this. I do believe that our ecosystem will change dramatically over the next 5 years, and open source will be one of those ways, certainly not the only way. And I think you will have read recently, we were involved in a number of pre-competitive consortia with large companies, small companies. We recently did deals with the National Institute for Health and the Medical Research Council in the United Kingdom and some really interesting things going on in Asia in terms of open sourcing. If you add into our portfolio the fact that we work with biotech companies such as Nektar, Rigel, Forest, and of course, we have some excellent peer-to-peer relationships with Amgen, Bristol-Myers Squibb, Merck, and of course, with GlaxoSmithKline. And actually, the GlaxoSmithKline one we do with a third party at the University of Manchester in inflammation space, which is very much an open-source type idea. Where does that come to in terms of the way that we work if I look at the virtual medicine unit that I've spoken about and you've read about in neuroscience? So this group had been going for a few months now. We hired a tip top leader in Mike Poole, an M.D. Ph.D. state in the art of neuroscience. He, in turn, has hired just outstanding people and appointed people from within AstraZeneca. There's now a group of about 30 people based in Cambridge, Massachusetts. They've already done 2 company deals. They did what I think is just a wonderful academic deal just within the last 2 weeks, 4 academic centers with true leaders in the Alzheimer's field. And last but not least, they inherited a legacy portfolio from the existing work and have now pushed that along with 2 first in human starts and 2 firsts in Phase II starts. So in answer to your point, Seamus, there's a lot happening. We are very much involved, every level of collaboration, every level of open source innovation. And we truly want to be a partner that people could come to because we're good people to work with. Again, let's spend some time when we're together going through some of the details on that.

Simon Jonathan Lowth

Seamus, thanks for your questions. And let me move on. We've got a question on the line here from Mark Clark at Deutsche.

Mark Clark - Deutsche Bank AG, Research Division

I just wanted to sort of drill into the emerging markets a little more. Two things really. Firstly, the 8% figure you mentioned for Q2 is the sort of underlying run rate in emerging markets. How exactly have you calculated that? And should we expect an even stronger run rate in the second half given the comps start easing in Lat Am? And secondly, just on China, your growth rate there is at the low end of sort of the cap pharma field, most reporting figures in the range of about 20%. Just wondering if you could just tell us why you're sort of slightly underperforming peers there and what can be done about that?

Simon Jonathan Lowth

Again, well, Mark, thanks for that. I mean, I think that fundamentally, we continue to see the emerging markets or, that's a pretty heterogeneous group of markets. But I think all tied together with some very strong fundamentals, large, growing, increasingly affluent populations, desire by individuals and governments to expand access to health care and medicines, and that creates a fundamentally attractive area of opportunity for us. And we will continue to invest very hard to capitalize on that opportunity with our product portfolio. In terms of the growth, I mean, I think the calculation, that's relatively straightforward. We can identify very specifically back orders and/or sales lost associated with the supply interruptions. By removing those, we expose essentially the underlying growth rate of 8%. But I think I'll probably hand over to Tony in the first instance to talk a bit more about, I think, questions on China and comparatives for the rest of the year.

Tony Zook

Great. Thanks, Mark. On China, we did post strong growth of 12%. If you look to the underlying demand in China, actually growth was a bit stronger than that. It's 16%. And if we would exclude the ERP issue that Simon had mentioned earlier, it would have been closer to 20%. And several parts of our portfolio, in fact, are showing substantial growth. Our cardiovascular business is up 22%. Our respiratory business is up 37%. Our oncology business is up double digits. And so we do expect China to pull through and continue to post strong results in the second half of the year as we move forward. As Simon said, the broader context of emerging markets in addition to the growth we expect coming from China, there are a series of other markets that we need to continue to take complete advantage of. We're pleased with what we're seeing in markets, for example, like Russia that are also up 15% for the year on the backs of some very strong brand performances. And so there is a mix as you would expect across the emerging market portfolio. There are some challenges like we see in Eastern Europe and a few others. But all in all, we do expect our growth rates to pick up, as Simon has suggested, in the second half.

Simon Jonathan Lowth

Well, thanks, Mark. And I think as Tony said in China particularly, I think that, and you saw in Asia, the supply chain interruptions did impact the relative growth rate versus the market and our peers. As Tony said, we have outperformed in many segments, 1 or 2 therapeutic areas not quite as up with the market. And Tony knows that's the job for the second half and beyond, and we're very focused on it. I'm going to go next to, if I may, Kerry Holford at Credit Suisse.

Matthew Weston - Crédit Suisse AG, Research Division

It's actually Matthew Weston on behalf of Kerry. Two questions, if I can. The first with respect to the supply chain interruption. Do you have any concerns there could be some permanent disruption to your brands? Or should we anticipate that in the second half of this year and particularly going to 2013, we should have a full rebound in sales of the products in question? And if you could actually just walk us through product by product, which are the top 3 or 4 which were most impacted? And then secondly, previously Astra has given medium-term guidance for $2 billion to $4 billion worth of sales from new product launches and probability adjusted pipeline. I think it was by 2014. Given the progress with Brilinta and the pipeline, I wondered if you were still confident in that range and whether or not you now include the Amylin deal and Ardea as being important to get into it?

Simon Jonathan Lowth

Okay. Well, Kerry, thanks very much indeed -- sorry Matthew. I beg your pardon. I'm looking at the screen here. Matthew, let me ask, if I may. On the supply interruption, I think the points I made in my remarks earlier that we're now back at well over full production. We're responding to demand. We're replenishing supply chain inventories. And during this period, we have been very focused indeed on meeting patient needs and have had very limited impact on patient demand. But Tony, perhaps, you could just touch on the question around which were the particular products and any questions -- anything you'd like to add further in terms of likely impact for the remainder of this year.

Tony Zook

Yes. Matthew, the brands that were primarily impacted were Symbicort Turbuhaler, Nexium and Atacand. Those were the brands that we felt more impact. And you asked if we believe that there is any permanent damage to the brands from a brand -- loyalty brand perception. No, we do not believe that. We believe that we have done a good job of managing at the local levels and have kept positions abreast of what was happening. And we are already beginning to see some rebound relative to share performance with those brands. And so again, it was limited. There were other brands involved, but the ones that were most involved were Symbicort Turbuhaler, Nexium and Atacand. And we feel confident that we're on a rebound performance in the early days so far.

Simon Jonathan Lowth

Tony, thanks. And then to your second question, Matthew, about the sort of prospect beyond this year, I mean, because as you know, our custom and practice is to review during the course of the late summer and then through into the autumn, we undertake our annual sort of update of strategy business plan, and then we update the market in terms of our midterm guidance and the end of January of our full year results. And that's exactly what we will do this year. And in terms of the specific question, the pipeline's sort of revenue potential, we revised that at the beginning of this year. And clearly, we're very committed in terms of delivery of our launches and pipeline to meet that goal. We can update you, I think, in end of January. So Matthew, thanks. Sorry Martin, you wanted to add something?

Martin MacKay

Just with the question that Matthew asked. Would the Amylin products be added to that 2 to 4? The answer is no. We have the list of products that are within that window. And as Simon said, we're still confident about being within that range.

Simon Jonathan Lowth

Let me go to Jeff Holford of Jefferies. Jeff?

Jeffrey Holford - Jefferies & Company, Inc., Research Division

First thing just on the net share repurchases, slight surprise at the run rate here for the first half given where the share prices have been. Have you seen any volume restrictions or other factors that's making it run what to me seems to be a slightly low rate given the target for the full year. And then just secondly, can you give us some sort of idea of how much resource is being spent in the U.S. promoting Brilinta and how do you, on an ongoing basis, keep evaluating whether you're putting too much against that product both on the marketing side and in terms on post-marketing development?

Simon Jonathan Lowth

Okay. Jeff, thanks. I mean, I can deal very quickly the first. I mean, I think as Julia mentioned, we've done a share repurchase of $1.9 billion. And we run a regular program. Yes, there can be some restrictions around trading. We try to put irrevocables in place. But we're on track with the goal for the year. The absolute gross number net down because of options exercised, which typically do happen in the first part of the year, and that's not an atypical pattern. Tony, on Brilinta and resourcing?

Tony Zook

Yes. Thanks. The selling resource within Brilinta in the U.S is certainly something that's been an area that we continue to focus on. We want to maintain a strong share of voice presence, but we also recognize that this is in a hospital dynamic. And so we have our CB specialty teams are focused on Brilinta in the U.S. We have 300 hospital reps. We have another 250 CB specialty reps, and this is their focus. As you know, we also have a great partner on board with The Medicines Company who bring 100 specialists that have very deep knowledge of the interventionist space. And so we're quite confident on what we're looking at from a resource perspective for penetration of Brilinta in the U.S. marketplace. I won't go into the total E&P spend for obvious reasons, but we have a look at these things every quarter. We tend to look at all of our brands. We want to know exactly the value that we're creating with our investment. And if we need to make changes, we do so, both up and down. And that's something that we discuss actively as a senior team across the organization.

Simon Jonathan Lowth

Tony, thanks for that. And Jeff, thanks for your questions. Next up, I think, is Keyur at Goldman Sachs.

Keyur Parekh - Goldman Sachs Group Inc., Research Division

I just wanted to follow up on something, I think, you've been quoted on regarding business development and M&A saying we should think of deals this year as being representative of acquisition hopes to do in the future. And I was just wondering if you could kind of provide some color around that. Is that in the sense of the size you're [indiscernible] talking about? Is that in the sense of the mix between pipeline and currently marketed products you're talking about? And just anything more on that, please.

Simon Jonathan Lowth

Sure. Okay. Well, look, thanks for the question. Yes, I think -- I mean, our business development priorities, I touched on this a little bit earlier, are to strengthen our pipeline, late-stage pipeline, and our on-market portfolio. That's the primary focus for the business development effort and where we're putting in the majority of our effort and likely if that's where the investment is concentrated. Having said that, and I think Martin made this clear, there's an enormous amount of collaboration, externalization going on and investment going on earlier in the pipeline, but that tends to be below radar screen for you guys. And I'll then talk about priorities in late stage pipeline and on market portfolio, where we're looking at opportunities that clearly benefit from our global late-stage development, regulatory access pricing commercialization capability, particularly that capability in primary care and sort of specialty care-led sectors. And that's certainly what you saw with the gout program, with the collaboration with the BMS in diabetes. We're also looking at opportunities that are strongly synergistic with our areas of priority research and development. And I think inflammation is an area that we see huge unmet need. And we've got some real capability. And we saw great value in a combination with Amgen. So fit with that sort of global development commercialization capability, primary specialty care led and also links into our areas of therapeutic and disease, our expertise in research and development. And in terms of structures that we'd looked at, I mean, I think that the -- in the first part of the year, you saw a collaboration with a peer in Amgen. You saw an outright acquisition of a Phase III asset. You saw an expansion of an existing collaboration with Bristol-Myers Squibb. We've got -- let's think about the things we've got in our late-stage pipeline, much more traditional in licensing deals at Rigel and Nektar. So we will look at the different mechanisms to support that business development effort. And I think genuinely, that portfolio is representative of the sorts of opportunities that we're looking at as we move forward. So I hope that gives you a sense of clarity about of our programs. So Keyur, thanks for the question. And I'm going to turn to Damien Conover at the MorningStar.

Damien Conover - Morningstar Inc., Research Division

I just wanted to follow-up on the negative European pricing environment. I just want to see what kind of strategies that could be implemented over the next 1 to 2 years if the pricing remains challenging, any strategies either directly or potentially indirectly by trying to take more price increases outside of your -- perhaps in the U.S. and in select emerging markets.

Simon Jonathan Lowth

I mean, I think we've said before, and I'll repeat, that we've always experienced low to mid-single digit price declines in Europe. It's been a regular feature of our business for many years. I think as Tony indicated, what we have experienced given the very significant economic challenges in Europe is price reductions, which we now are really testing the upper limit of that in the mid-single digits. And I think our first and foremost priority within Europe is to ensure that our medicines get to the patients that need them. And we are working with governments to ensure that that happens, and we're making our contribution as a sector to addressing the current economic challenges. But having said that, we clearly need to see pricing that, over the midterm, properly rewards innovation, properly rewards value in our medicines. And we're working at multiple levels to ensure that that happens through industry bodies, with regulators, with policymakers in each and every market. And in addition to that, obviously, we're very focused on research and development, in bringing through medicines that bring real value to patients in these markets. And finally, of course, we're operating an efficient business. We have been working very hard in ensuring that we can bring valued medicines to patients at a lower cost, and therefore, can manage in an environment with those sort of pricing pressures. But I think it's important to say that we need to see an environment within Europe that properly rewards innovation, and we're working actively to ensure that happens. Tony, I think you'd like to add to that.

Tony Zook

The only point or 2 I might add, Simon, is that we also have a responsibility to go to our payers with very clear value propositions. And I think oftentimes, we look at the government interventions and recognize what they're trying to manage. They are managing increased volume consumption of health care, but they have to do so within a restricted budget. And I think the onus of responsibility falls back to us as organizations to make sure that we are bringing forward very compelling and clear value propositions. And that, for us, translates into having to have very strong working relationships with R&D. We now will not accept the dossiers that are coming through our R&D organization unless Martin and I have also signed off on the value proposition and the reimbursement dossier that will describe to these governments how we can extract and they can extract value from the brands. So I think that's an important aspect. We also are very conscious of what we do within but as well as outside Europe where we do choose to contract. We really study these markets quite well. We don't chase poor business. In fact, we've been able to realize higher net prices per average in the U.S. marketplace for our brands to many of our competitors because we're very discerning as to where, in fact, we choose to contract. And I think Nexium is a good example of that. Even late in its life cycle, we're seeing a price positive variance because we're choosing not to pursue certain books of business. And so I think that's something that we will continue to look at. And when we talk about the strong partnership with R&D, we took that very seriously as we were bringing Brilinta forward into all of our global markets. And we believe that we did have a compelling, not just safety and efficacy story, but a value proposition that then enabled us to translate into a price premium of almost 20%. And so you have to start this game very early but don't blame the governments later if you don't have that value proposition.

Simon Jonathan Lowth

Thanks, Tony. Damien, thanks for the question. Let me turn to Naresh at Liberum. Naresh?

Naresh Chouhan - Liberum Capital Limited, Research Division

I've got 2 questions. Firstly, on European pricing. Sorry, Tony, can I push you on this? What was the -- on Western Europe, what was the actual price decline? There seems to be a bit of a divergence with Glaxo claiming to had an 8% price cut and Roche only having a 2% price cut in Europe. Can you tell us where you are? And then secondly, Tony mentioned that when you come to look at Crestor pricing, if Medicare, Medicaid, you can't get a sensible price, you may not sell into those channels. Can you give us a sense of how likely then that is and what the potential impact might be?

Tony Zook

Sure. I'll give you my sense of what's happening within Western Europe. We have seen around the mid-single-digit price erosion is what we've seen in our Western European markets in total. There have been a few markets that are slightly above that, as I had mentioned, in Southern Europe. But in total, it's mid-single digits for us in Western Europe. Relative to Crestor and the impact of the Medicaid business that we wouldn't pursue, it's a very small percentage of the business. It's like less than 0.5% of the overall business. And so it would have a very small impact on volume but have an even more positive effect on net price per tablet.

Simon Jonathan Lowth

Yes. I'd say -- actually, I just wanted to add to your point on Western European pricing, Tony. This is heavily dependent -- this is not about a constant, sort of an average price by all market. This can be very different between different markets. And therefore, what we're stating and what we have seen as sort of mid-single digit is an average of the range of markets. And therefore, individual peers at any one period is going to be heavily influenced by that geographic mix. So just an important caveat for you to use in interpreting these numbers. Question, I think, penultimate question, if I may, given the time period to Steve Scala at Cowen. Steve? And then we're going to have to --

Steve Scala - Cowen and Company, LLC, Research Division

I have 2 questions. I understand that EPS guidance always anticipated the tax benefit realized this quarter. But why did the tax rate guidance not anticipate this? And second, AstraZeneca previously stated their plan to exercise ACLP option, too, at the earliest opportunity. So the question is what changed? Was it simply that you couldn't agree on valuation? Or do you now have doubts about the sustainability of the assets, maybe particularly Nexium, that you didn't have before?

Simon Jonathan Lowth

Well, Steve, thanks for that 2 questions. On Merck, we had an original construct which allowed for exercise in '12 or in '17. In discussion with Merck, we arrived at an option to exercise in 2014. And in doing so, at a method and a value which removed uncertainty for both parties and also gave to us what we deem to be and saw as a very favorable economic construct. And so I think both sides felt that that represented the optimal path forward. So it was more about an approach which removed uncertainty for both sides, and in fact, in doing that, gave us a good economic outcome. So that was on 2014. And in terms of the tax rate, I think, Julie, you've touched on this, we're talking about, we've taken a risk-adjusted view, and the settlement essentially crystallized that on the positive. Steve, it could equally be negative against us, as these matters are. So that quite really captured it. Wasn't it, Julie?

Julie Brown

Certainly, Simon, yes.

Simon Jonathan Lowth

Okay. So Steve, thanks for that. And we've got one question here that's coming on the WebEx from Timothy Gasperoni of Sabby Capital. And Timothy is looking for, Martin, timing update on Phase III programs for naloxegol and fostamatinib. Martin?

Martin MacKay

Thank you, Simon. And just to say for both naloxegol and fostamatinib, we're on track with the programs and on budget. Some more specifics, as you know, the naloxegol programs, the KODIAC studies, we've got 2 pivotal 12-week studies. And those will read out in the last quarter of this year. You will also remember we have a 52-week long-term safety study, and that will read out in quarter 1 of 2013. So that's naloxegol. In terms of fostamatinib, this is the OSKIRA program. The Phase III studies will read out in the first half of 2013. But we also have a Phase II monotherapy study, and that will read out late in 2012.

Simon Jonathan Lowth

Well, Martin, thanks. I think possibly Timothy might also be interested to hear about brodalumab.

Martin MacKay

Yes. Well, we're very excited, Simon, to say the least, with this program in psoriasis. It's a fine antibody. Amgen are going to be a terrific partner for us. We also have 4 other antibodies. I won't go through the names of them all at this stage, but updates will be at later dates.

Simon Jonathan Lowth

Martin, thanks very much indeed. And Timothy, thanks very much for your question. So we have now, I think, reached the end of the allotted time. Listen, thank you very much indeed for joining us and for your questions, particularly on what I know is a very, very busy reporting day. So thanks again.

Our revenue -- as I said, just closing remarks. Our revenue profile for the year, we expected it to be shaped by the loss of exclusivity on some key products in a challenging environment. But despite those, those challenges, we continue to drive performance for brands and in regions that respond to the commercial investment we can put behind them. As we've talked about on this call, we're controlling costs. We're delivering productivity savings to ensure our long-term competitiveness. We're investing hard in research and development to renew our pipeline for the future and in business development through our collaboration with Amgen, the acquisition of Ardea, the expansion of our diabetes alliance with BMS. Well, that's playing its role also to bolster both our pipeline and our on-market portfolio. So with that, let me bid you all a very good day. Thank you.

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