AstraZeneca PLC Q2 2010 Earnings Call Transcript

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AstraZeneca PLC (NYSE:AZN) Q2 2010 Earnings Conference Call July 29, 2010 7:00 AM ET


David Brennan – CEO

Simon Lowth – CFO

Anders Ekblom – EVP, Global Medicines Development


Tim Anderson – Sanford

Sachin Jain – Merrill Lynch

Gavin Macgregor – Credit Suisse

Gbola Amusa – UBS Investment Bank

Andrew Baum – Morgan Stanley

Marcel Brand – Cheuvreux

Lorris Habring (ph) – SEB

Seamus Fernandez – Leerink Swann

David Brennan

Good afternoon ladies and gentlemen and good morning to those of you in the States who are joining us, I would like to welcome you to our webcast and conference call to go through our second quarter and half year results for 2010.

So I am going to start with a review of the key events since we last convened for our full year results back at the end of January and then look at the headline numbers for the first half of the year.

Simon Lowth is here, Simon will take you through the second quarter, he will focus on revenue by region and by key brand and also take a detailed walk through the P&L and then will end up with the updated outlook that we have announced around our financial guidance for the full year. Anders Ekblom is also here and he is going to provide the half yearly update on the pipeline and I expect we will have plenty of time for questions. So look forward to that as well.

Let me begin with an overview of some of the key developments that have taken place in the past six months and I guess it’s hard not to start anywhere except yesterday’s FDA Advisory Committee Brilinta. Clearly we are pleased that the committee recommended the approval of Brilinta at yesterday’s meeting. So I am sure that the views that have been expressed by the committee and the committee members will help to focus our continuing discussions with the FDA. Obviously, that's now our priority for the U.S. submission.

We believe that Brilinta should be approved not only in the U.S. but in other countries around the world and to that end we have made nine submissions in territories including the European Union, Canada and Brazil and we expect to pursue further approvals in the coming months.

The second event I would highlight is the U.S. Court decision upholding the patent for Crestor in the United States. This was announced at the end of June. It’s a very important affirmation of the strength of our intellectual property and it derisks our U.S. Crestor revenue now closing in on an annualized basis of about $2.5 billion. So very significant event.

At our full year results, we affirmed our commitment to a business model that at its core is driven by investment in innovative prescription based biopharmaceutical research and development and with commitment comes a responsibility to ensure that investment earns an attractive return for our shareholders. We have launched a major set of initiatives to tackle head-on the need to improve the productivity of the investment and research and development. So the third item I will highlight in my review is the progress that we have made on the R&D change program since the turn of the year.

We have made three significant leadership appointments, two from outside the company. I am delighted that Mart Mackay has joined us as the President of our Research and Development organization. Martin has impeccable scientific and leadership credentials combined with extensive experience in our industry. Martin’s appointment to this new role is going to provide a single point of accountability and senior accountability as we continue to make the changes necessary to improve the productivity and efficiency of our research and development organization.

We also recruited Mene Pangalos to be our new Executive Vice President of Innovative Medicines. This is the newly created organizational structure where our discovery research and early proof of concept development work has all been consolidated into these innovative medicine units.

The third major appointee was the internal appointment when we named Anders Ekblom as Executive Vice President of Global Medicines Development. This is a group that will undertake the late stage development work for both small molecules and biologics but we didn't wait until the leadership positions were fully staffed to get on with the business of change and under the leadership of Anders and also Christer Kohler who has helped with Anders and the rest of the organization with this, he is now heading up the neuroscience innovative medicines units. The entire organization has been engaged and energized to transform the way we conduct the research and development.

Our disease areas have been thoroughly reviewed and prioritized. As you know, a few of them have been marked for disinvestment as we focus our resources following a rigorous portfolio assessment. It included an analysis of technical risks and organizational capability as well as a thorough exploration of market attractiveness including disease prevalence, degree of unmet need, competitive intensity and increasingly importantly as you all know society’s willingness to pay for incremental innovation.

Our portfolio investment board is up and running. This is the cross functional governance group chaired by me, that's now accountable for allocating all research and development investments within the group. I want to personally thank Anders and Christer for their leadership and their contribution during this period of significant change in transition. As I said, you will be hearing from Anders a bit later for the pipeline update.

Fourth area I will cover and focus on is emerging markets. At our emerging markets analyst day back in March we provided a comprehensive look at the emerging markets opportunity, our historical performance and mostly importantly a look at the strategies we are pursuing to profitably grow in this important part of the world market. At that meeting we showed this slide based on IMS data indicating the 70% of the incremental growth in the world pharmaceutical market over the next several years is projected to come from emerging markets. That evolution is certainly evident here at AstraZeneca.

Here is the snapshot of our revenue picture in the first half of 2010. You can see that emerging markets, which account for about 15% of our total revenue contributed around 60% of our incremental revenue growth in constant currency terms. We following our emerging markets day with enhanced regional disclosure beginning with our first quarter results providing great transparency for product sales at the regional level. Analysts can now track sales of our key brands in the U.S., Western Europe, other established markets and emerging markets and we appreciate the feedback and the positive feedback that we have received on this move.

Healthcare reform has been seen as an important part of the agenda in the first half of 2010. First there was the passage of the landmark U.S. healthcare reform legislation. As we mentioned at our first quarter results, we estimate the impact in 2010 to be around $300 million and that was fully considered in the financial guidance we gave back in January. Our first pass assessment of the impact for next year is for a bit more than double this year’s revenue hit but I am sure we will have a better handle on that as we work our way through the actual implementation of this very complex piece of legislation and it’s enabling regulations. More recently, attention’s been focused on government pricing interventions in Europe. We all know it’s not a new phenomenon. It’s been a feature of the market landscape for years.

Over the past several years, we budgeted for and absorbed around low to mid-single digit price erosion in our Pan-European business every year. These interventions tend to be system wide, so aside from slight differences in regional or product mix, most major pharma companies are similarly exposed.

So, far we estimate that the impact on our first half results has been more or less in line with this historical trend. The headwind will be a bit stronger in the second half and of course, we won't see the full annualized effect of these changes until 2011.

As you’d expect, we’ll monitor the developments closely particularly as we complete our planning cycle in the autumn, but as yet, I wouldn’t call it a step change in the market environment but it certainly is a bit more of a squeeze than we would have otherwise planned for based on historical trends.

The final observation I’d like to make before I turn to the headline numbers is on the response to our full year results presentation, where we communicated our planning assumptions for revenue and margin evolution over the 2010 to 2014 planning period. And our assumptions for the generation and utilization of the significant cash flow that could be achieved if we performed the plan, we don’t plan on revisiting this midterm assumptions every quarter, we’re going to review them on an annual basis at our full year results presentations.

As we said it the full year, subject to investment opportunities and prospective returns, our aim is to reinvest approximately 40 to 50% of our pre-R&D post-tax cash flows to drive future growth and value. After reinvestment in the business, the residual cash flow will be available for any other business needs that arise, for repayment of debt as it comes due and for distribution to our shareholders. At the heart of our shareholder distribution policy is funding the Progressive Dividend Policy.

You will have seen today that we announced a first interim dividend of 0.70 per share. This is the first dividend announcement since we adopted the new policy. The press release covers the rationale for the first interim dividend and Simon will touch on that in his remarks in a few minutes as well.

Second element of shareholder distribution system is to share repurchase program. We’ve said that the board will keep under review the opportunity to return cash in excess of our requirements through shareholders through periodic share repurchases.

In the first half of the year, we completed $516 million towards our initial target of $1 billion in net share repurchases in 2010. Today, the board announced the doubling of that share repurchase target aiming to repurchase a net $2 billion for the full year.

So, with that as an overview, let me turn to the headline results for the first half 2010, and when I refer to growth rates, they’ll be on a constant currency basis.

Revenue in the first half was nearly $16.8 billion that’s a 4% increase. As I mentioned earlier, a large part of that was driven by emerging markets, where revenue was up by 18%. Core operating profit was up 5%. So, once again, we’re able to achieve profit growth ahead of revenue growth as we maintain the cost discipline and as we drive efficiencies throughout our organization.

Core earnings per share increased by 16%, benefiting from lower net finance expense and a lower effective tax rate and in bridging from core earnings per share the reported total adjusting items to core earnings were higher than in the first half of 2009. Although restructuring charges were lower in 2009, they were more than offset by the legal provisions. Therefore, the growth and reported earnings per share was higher than that for core earnings per share and that was up 23% for the first half of 2010.

As I already mentioned, the board has declared a first interim dividend then of 0.70 per share. So, now, let me hand it over to Simon, who will take you through the second quarter performance. Simon, over to you.

Simon Lowth

Well, thank you, David, and good afternoon or good morning to everyone. David summarized the first half financials, so I will cover five topics.

First, I’ll describe the headline numbers, revenue highlights and operating profit for the second quarter. Second, I will provide a brief update on our restructuring and productivity improvement program. I’ll then touch on cash performance and our steadily improving net debt position. I’ll explain the details behind our actions on the dividend and share repurchases. And finally, I’ll explain the upward revisions to our targets for the full year.

So, turning first to the headline numbers for the second quarter, we achieved revenue of nearly $8.2 billion, a 1% increase in constant currency terms. You’ve ever seen that the positive impact of currency movements on the top line increased the reported sales growth rate to 3%.

Core operating profit for the quarter was unchanged at constant currency to $3.65 billion. In the quarter, the contribution from the increased revenue and lower operating costs was offset by the decline in other operating income. You’ll recall that last year’s second quarter including the Nordic OTC disposal gain.

Core earnings per share in the quarter were $1.79 compared with $1.64 last year. This is a 9% increased at constant currency. Lower net finance expense and a lower effective tax rate in the quarter provided the uplift to Core EPS growth over the growth in core operating profit.

Making the bridge from Core EPS to Reported EPS in the quarter, we have the usual adjusting items. In this case, restructuring cost was higher in this quarter chiefly due to the R&D restructuring that we announced the full year. But this was more than offset by the 0.30 per share legal provisions taken last year. So, net of this adjusting factors that lifts the growth rate in reported earnings per share to 22% in constant currency terms, that’s to $1.46 compared to $1.18 in the second quarter of 2009.

I’ll let now take a closer look at our revenue performance for the quarter, first at the regional level and then for the key brands. When I refer to growth rates, they will be on a constant currency basis.

As I said in the headlines, revenue growth was 1% in the quarter. Revenue in the U.S. was down 4%; good growth to Crestor, Symbicort and Seroquel was more than offset by generic competition on four products, Toprol-XL, Pulmicort Respules, Casodex and Arimidex. Together, these four products took more than $300 million on nearly 9% out of second quarter revenue in the U.S. compared with last year.

Turning now to Western Europe, revenue was up 1% in the quarter as volume growth just exceeded the price declines that David mentioned in his opening remarks. Prices were generally down across the portfolio, with Nexium being the largest price decline in dollar terms. You’ll all be aware that Nexium in Europe has been at risk to generic filings and approvals since March when daycare exclusivity in the so called ten-year markets expired.

So far the pace of approvals has been slow, so actual results are towards the higher end of the scenarios that we contemplated at the beginning of the year, and I’ll come back to this when I talk about our revise guidance.

In mid-July, we did see a generic approval in the U.K., the first in a major European market. Revenue in other established market and as reminder that’s comprised of Japan, Canada, Australia and New Zealand was up 4% in the quarter. Here, you can see the impact of the biannual price cuts in Japan, where revenue was down 1% despite good volume growth.

Revenue in emerging markets was up 16% in the second quarter. Strong high teens (ph) volume growth in emerging Europe was reduced to 6% revenue growth as a result of price reductions largely in Turkey. Revenue in China was up a strong 27% and other emerging rest of the world was up 24%.

I’ll now call out some of key brand highlights for the quarter beginning with Crestor, and in all instances the growth rates will be in constant currency terms.

Crestor sales were up 23% in the quarter to $1.4 billion. Sales in the U.S. were up 24% to $679 million. Crestor totaled prescriptions increased by 12% that is four times the stat in market growth rate. Crestor’s growth is supported by the (inaudible) and new indication based on the JUPITER Study. Crestor share of total prescriptions in the U.S. continued to increase reaching 11.8% in June. Crestor’s dynamic share, so that’s new and switch patients is now over 16% ahead of Lipitor and now second only to Symvastatin. Did (ph) our share of the switch market is well over 20%.

Crestor sales in the rest of the world were up 22% to $751 million. Crestor volume growth is three times the statin market in the rest of the world. Sales in Western Europe were up 22%. Sales in established rest of the world were up 20% with all of the individual markets contributing to the strong performance and sales in emerging markets were up 28%.

Turning to the Seroquel franchise, second quarter sales were up 8% to $1.35 billion. We’re now providing revenue breakdown between Seroquel Immediate Release or IR as we call it and the extended release Seroquel XR, and you can see that sales of Seroquel XR have nearly doubled in the quarter to just over $300 million that’s a 22% of the total franchise.

In the U.S. Seroquel sales were up 8% to $965 million. Total prescriptions for the Seroquel franchise increased by 70 basis points in the quarter, that’s high in the 120 basis point increase in the atypical anti-psychotic market. So, market share for the total franchise is down just a bit around 36 basis points since March of this year.

Fueled by the bipolar depression and the adjunct MDD indication, Seroquel XR now accounts for 15% of franchise prescriptions in the U.S. in June 2010. Seroquel XR sales in the rest of world were up 51% in the quarter and now account for nearly 1/3 of franchise sales outside the U.S.

Total Seroquel franchise sales in established rest of the world were up 27% on growth in Japan. There was even some growth in Canada, now that generic erosion of the immediate release form are stabilized following the lost of exclusivity last year. Franchise sales were up 17% in emerging markets. Sales were down 2% in Western Europe. We’re expecting approvals for the adjunctive treatment of major depressive disorder in Europe shortly.

Symbicort sales in the second quarter were up 20% to $664 million. Sales in the U.S. were up 63% to $181 million. Symbicort prescriptions were up 57% accounting for nearly all of the 6% growth in prescriptions for fixed combination products in the quarter. In the U.S. Symbicort share of new prescriptions for fixed combination products increased to 18.8% in June 2010 that is up nearly 5 percentage points compared to June 2009. Market share of patients new to fixed combination therapy is now 27%.

Symbicort sales in the rest of the world were 9% ahead of last year. Sales in Western Europe were up 3%. Sales in established rest of the world were up 38% reflecting the launch in Japan and sales in emerging markets were up 18%.

Nexium sales in the second quarter were unchanged with sales of just over $1.2 billion. Sales in the U.S. were down 4% to $695 million. Dispensed retail tablet volume declined by 5%, although we are doing an excellent job of holding share. Nexium market share of dispensed units is only down six basis points in June 2010 compared with December 2009 and that is without any direct field sales force promotion as we’ve transitioned all promotional support to new channels, such as our customer service associates, inside telephone sales and internet-based support. Average realized prices were just about flat versus the second quarter last year and that follows a 6% decline in the first quarter.

Sales in Western Europe were unchanged, but as I mentioned earlier better than our guidance assumptions around timing of possible generic entry. Sales in emerging markets were up 18% including 35% growth in China.

The last product I’ll mention is Arimidex. Sales of Arimidex were down 10% in the second quarter to $439 million. Sales in the U.S. were down 17% to $185 million. Multiple generic products were approved and launched in the U.S. at the end of June. They haven’t affected prescription volume in the quarter, but our X factory revenue includes a provision against pipeline inventory in the market place. We would expect rapid erosion of Arimidex sales in U.S. in the second half of the year.

The situation in Western Europe is different. Sales in the quarter were down 5%. Under the terms of the European Union Pediatric Regulation, we have filed applications for extensions for the supplementary pattern certificate or SPCs in 12 applicable member states. If granted, this would extend market exclusivity from August 2010 until February of next year. Extensions have now been granted in 10 of the 12 member states so far including France, Italy and the U.K. So, this also factors in our revised guidance for the full year.

I’ll now turn to the second quarter PNO. Our focus here on core margins and profits. The press release does, of course, contain the statutory numbers and a detailed reconciliation to our core measures. As with sales, when I refer to growth rates, they will all be on a constant currency basis.

Core gross margin at 83% of sales was an 80-basis point improvement over 2009 in constant currency terms. The principle contributors were lower Merck (ph) payments as a percent of sales, efficiency gains and favorable product mix partially offset by higher royalty payments.

Now, the first quarter, I said that the Q1 gross margin of 80% was likely to be represented over the run rate to gross margin for the full year and I still think that that is the case. So, put the higher Q2 margin down to phasing ahead of the tougher revenue outlook in the second half.

Core SG&A expense was up just 1% ahead of the second quarter last year, but we continue to invest to grow our emerging markets business and there were some high legal cost in the quarter, but these were largely offset by operational efficiencies across the established markets.

You can see here the impact of lower core other income for the quarter. Last year, we booked a $220 million gain on the Nordic OTC disposal. I still expect core other income to be lower than last year, and that leads to a core pre-R&D operating margin of 56.4% in the quarter that’s down 150 basis points in the quarter, chiefly on the decline in other income.

Core R&D expenditures were 9% lower in the quarter. The increased investment in biologics was more than offset by reduced activity across the small molecule portfolio, which includes the impact of several late stage projects completing their trials. The prior year quarter also included the $44 million impairment on the map respiratory project. Spent on the small molecule portfolio is expected to increase in the second half of the year, driven by the phase 3 trials for the anti-depressant TC-5214 that are now underway as well as the anticipated start of phase 3 program for the Fast D project in rheumatoid arthritis that we in-licensed from Rigel earlier this year.

So, core operating profit was unchanged in the quarter in constant currency terms. Core operating margins for quarter was 44.6% of sales down 30 basis points compared to the second quarter of 2009.

Just a brief word on restructuring, we’ve taken $470 million in restructuring charges in the second quarter. Around three quarters is related to the R&D restructuring activities announced at the full year. This R&D restructuring costs a largely related to the cash costs that are incurred for the portion of the estimated reduction of positions identified to date.

In aggregate, restructuring cost across all functions of $565 million has been charge in the first half. The 2010 phasing of costs and benefits for the total background is broadly in line with that communicated in our full year results announcement.

Let me now turn to cash flow. Net cash from operating activities would’ve grown more or less in line with the increase EBITDA were it not from the impact from payment of the first installments in the respect to the U.K. tax settlement and for the Seroquel’s sales and marketing practices in the U.S. These payments resulted in the $567 million decline in that cash from operating activities. This cash was used to fund increased external expenditure through the Merck Option First payment of $647 million the acquisition of Novexel and late stage in licensing deals with Targacept and Rigel.

Returns to shareholders increased by nearly $800 million to almost $2.9 billion as a result of the increase dividend and resumption of our share buyback program. After the increase levels of investment and returns to shareholders, the residual cash flow increased our net cash position to $903 million, an improvement of over $5 billion since June 2009.

David already alluded to our commitment to return cash to shareholders via our Progressive Dividend Policy and through returning cash in excess of our business requirements through periodic share repurchases. So, let me just touch on the specific actions that we’ve taken on each of these two elements at the first half.

In implementing the new dividend policy, the board has recommended the first interim dividend of 0.70. This reflects the Board’s intent to rebalance over time the first and second interim dividends with the aim of setting the first interim dividend at around 1/3 of the prior year dividend, which last year you’ll recall was $2.30. As for share repurchases, you recall that the Board initially set a target of $1 billion for net share repurchases for 2010 and through the end of June, we were just over halfway there with net share repurchases of $516 million.

Today, the Board announced a doubling of the net share repurchased target to $2 billion for the full year 2010. So, we’ll be looking to achieve net share repurchases of around $1.5 billion during the second half.

Finally, I’ll explain the drivers of the increase in our full year guidance. We generated a good performance in the first half with revenues up 4% and core earnings per share 16% ahead of last year. We always knew that the full year would have a strong first half bias. We cautioned when we set our guidance that the lost of exclusivity for Arimidex, more competition for Toprol-XL in the absence of the H1N1 flu vaccines revenues would make for a difficult second half comparison on the revenue and Core EPS.

In fact, we’ve already seen some of this in the second quarter revenue performance in the U.S. And as David mentioned, the European government pricing interventions will grab a little bit more in the second half of the year as well.

So, what is behind our increase full year guidance? Well, firstly, it does reflect the good first half performance. Amongst the second half will still be difficult, it should be better than our original expectations chiefly due to the timing of generic entry for Nexium and Arimidex in Europe.

We now anticipate a revenue decline in the low single digits for the full year in constant currency terms and for Core EPS, we now expect core earnings per share of between $6.35 and 6.65. Just to remind you, this guidance is based on actual results for the first half and the forward look is based on the same January 2010 average exchange rates upon which our full year targets were initially set.

Actual currencies for the first quarter were broadly neutral to January 2010 guidance rates, but we’ve seen around a negative impact of 0.03 per share in the second quarter numbers. Of course, we’re taking no view of the future movements for currency. So, going forward, this guidance takes no account of the likelihood that average exchange rates for the remainder of the year may differ materially from the January 2010 average. As usual I point you to our currency sensitivity chart to help you flex your own estimates on the currency impact for sales and earnings.

So, I’ll wrap up my formal remarks here and turn things over to Anders Ekblom, who will provide a pipeline update. Anders?

Anders Ekblom

Thank you, Simon. And I now like to provide you with an update on our pipeline on medicine in late stage development. Just in the busy first half of the year and over the next 20 minutes or so, I’d like to run through three main areas.

First, I’ll read you the key event in our late stage pipeline for the first half of the year. I’ll then highlight some of our most advanced development projects to give you a flavor of the potential pipeline delivery over the next few years, and finally, I’ll touch on the expecting news flow for the second half of the year highlighting those areas of most significant.

So, let’s start with the first six months of the year. The first half of 2010 has seen the approval of new products in the U.S. and approved (inaudible) indications for a number of our global brands.

In April this year, the U.S. FDA approved the Vimovo, a combination Naproxen, a pain relieving NSAID with our immediate release PPI esomeprazole. It was developed in collaboration with POZEN towards the new treatment option for patients with certain types of arthritis or spondylitis, who are at risk of developing NSAID associated gastric ulcers. We would begin the commercialization of Vimovo during the second half of the year.

As I’m sure you’re all aware, yesterday the U.S. FDA Cardiovascular and Renal Drugs Advisory Committee issued a positive opinion for our investigational oral anti-platelet treatment Brilinta. Despite advancements in the treatment of ACS, post-ACS mortality rates remain high and there’s a real need for new products for these patients. Brilinta works differently to existing therapies as it binds reversibly to its target without the need for metabolic activation leading to more active and consistent inhibition of platelet aggregation and ultimately, includes cardiovascular outcomes.

Indeed, this is what was shown in the real world PLATO study, which showed a compelling improvement in the composite primer end point of the study. It approved Brilinta could provide an alternative to Clopidogrel for patients with ACS. We’re obviously pleased with FDA Advisory Committee’s Board which supports our own views of the strength of the Brilinta profile. We look forward to continuing to work with the FDA as a complete MDA review for Brilinta ahead of the PDUFA action date in September.

It is also important to remember that today, we have made eight additional major submissions around the world with many others planned to anticipate the C.G.P. (ph) opinion in the latter part of the year, which have C2 MCU (ph) commission deficient in the first quarter of 2010.

We’ve also seen Crestor approved for new indications in both U.S. and Europe based on data from a large scale JUPITER study, which is helping to reinforce the best in category status of Crestor.

Seroquel XR took an important step towards helping patients with Major Depressive Disorder in the Europe. The CHMP issued a decision that the benefit risk profile for Seroquel XR was positively used an add-on medication in Major Depressive Disorder patients who have had some of similar response to treatment with other anti-depressants. We anticipate the final approval by the EU very soon.

You will also note from our update pipeline table that following the CRL (inaudible) monotherapy and GAD in the U.S., we have withdrawn these applications. These effectively complete the Seroquel R&D program and have been sad to say that this program has delivered the most comprehensive label of all the typical anti-psychotics. The strength of our commercial organization has then been able to translate that into the successful product we have today, helping many patients worldwide.

We’ve also gain approval for a new higher dose of Faslodex, which has been shown to be associated with delayed tumor progression and a triumph for better overall survival. Other regulators submissions are ongoing and we see this as being significant growth driver for Faslodex in the future.

Nexium was submitted for the first time in Japan and this come from the back door looks to be a strong launch of Symbicort in Japan early this year.

Finally, we’ve spoken a lot in the recent months about our progress and plans in emerging markets. This is not only confined to our commercial organization as (inaudible) R&D is also focusing there often in terms of our regulatory submissions, but also in terms of our clinical trial. The approvals of Faslodex, Nexium for peptic ulcer bleed and the filing of ONGLYZA in China will help drive the (inaudible) to our business in the short-term as the portfolio on medicines we have in emerging markets catches up with many western countries.

We’re also focusing on bringing our new medicines into the emerging markets more rapidly and Brilinta is a good example. The PLATO trial was conducted in 43 countries worldwide and we have already submitted the first regulated (inaudible) from emerging markets.

While we are delighted with this clear progress in some areas, it’s sad to say that it hasn’t all been plain sailing and there have been some disappointment in the past few months. The disappointing phase 3 of the (inaudible) for Recentin have lead to the decision not to file any regulatory applications in first line Colorectal Cancer or Recurrent Glioblastoma. While Recentin shows clinical activity, we did not consider sufficient top revival alternative to the current standard of care. We will continue to investigate replication of Recentin in a number of ongoing studies and will publish results as they become available.

In terms of regulatory submissions, our antibody gains Respiratory Syncytial Virus for Motavizumab received a negative U.S. advisory committee opinion in June. We will continue to work with FDA as they complete their renewal of the dossier with a PDUFA date of August 27th.

Also in the U.S., we have received complete response letter for Axanum and Certriad, recurrent evaluating the CRLs and talking with FDA to determine the next steps for the applications. Meanwhile, we submitted our (inaudible) authorization application of Axanum, the EMA in June this year and are continuing with plans for submissions in the rest of the world in the second half of the year.

I would like to take a look at some of the key late stage product in our pipeline. Let me move on to Dapagliflozin, one of two noble agents that we are developing for the treatment of type 2 diabetes in collaboration with our partners at BMS. Dapagliflozin could be the first in the new class of anti-diabetic agents that work for increasing the excretional glucose by the kidneys. It’s mechanism of action is completely independent of insulin, which is attractive and could therefore be used at any stage of the disease and in combination with any of the currently available therapies in diabetes.

Following the initial phase 3 data presentation in 2009, reported the latest phase 3 data at ADA meeting this June. This data as add-on to insulin helped build a picture of the overall benefit (inaudible) Dapagliflozin and hopefully, you are now starting to get the sense of this. The impression I took away from those attending ADA meeting was of increase confidence in the SGLC inhibitor class generally and in the lateral thinking (ph) particularly.

There will be further stage 3 data presented at the EAC meeting in Socon (ph) in September, including active comparative data, which will provide the final piece of the jigsaw ahead of our anticipated global regulatory submission in the fourth quarter of 2010. I’ll just remind you at this point that the SGA submission is contingent on meeting the requirements for cardiovascular events as part of the package supporting and new anti-diabetic therapy and this is something we are closely tracking as we approach the fourth quarter.

Moving on to the oncology therapy area let me update you on our noble oral PARP inhibitor, Olaparib. At ASCO last month, we saw the PARP inhibitor story but (ph) beyond the proof of concept data presented last year in breast and ovarian cancers in patients with mutations in the BRCA G (ph). We presented phase 2 data in serous ovarian cancer showing clinical activity of Olaparib in patients with active BRCA mutation confirming that PARP inhibitors could be valuable in treating a gBRCA (ph) patient group.

The positive group of concept data has provided good platform to start our phase 3 program in breast cancer in patient with the BRCA mutation. These trials will start in 2011 and are contingent on completing work to deliver more convenient public formulation. Initial regulatory filings are expected in 2014.

In the meantime, a randomized phase 2 trial in various ovarian cancer will deliver data later in the year and will help us evaluate the fast forward in ovarian cancer.

Staying with oncology, let me say a few words about Zibotentan as is the next stage 3 project to deliver data. Prostate cancer is the most commonly diagnosed male cancer in many western countries and its incidence is increasing. Hormonal treatments that block testosterone provide a great benefit for many men but the majority of patients eventually become resistant. For these men, chemotherapy is the only widely available treatment that has demonstrated the survival benefit.

Over 300,000 men with prostate cancer will develop Castration Resistant Prostate Cancer each year and it is here we are investigating Zibotentan. Zibotentan is an oral, once daily and a female receptor antagonist on the development in prostate cancer. You remember that the phase 2 data, which demonstrated a meaningful improvement in overall survival compared to placebo. This was the foundation for initiating our ENTHUSE phase 3 program.

The ENTHUSE program comprises three trials involving over 3,000 patients worldwide. The trials are designed to evaluate the clinical benefit of Zibotentan across the spectrum of Castration Resistant Prostate Cancer.

ENTHUSE M0 is looking at one abuse (ph) in non-metastatic disease. This trial is actively recruiting and is due to report in 2013.

ENTHUSE M1 is investigating in Zibotentan in metastatic disease that is asymptomatic or mildly symptomatic for pain. This trial has now fully recruited its target of 580 patients worldwide and is due to report mature overall surviving data in the last quarter of this year. If positive, this would enable the first regulatory submission in 2011.

Finally, ENTHUSE M1c is examining to attempt (ph) and in combination with docetaxel for the treatment of symptomatic metastatic disease. This trial is fully recruited and is due to report in 2011.

I look forward updating you with the first phase 3 data from this program towards the end of the year.

Now, looking at the neuroscience therapy area, I’ll highlight our existing late stage project for the treatment of major depressive disorder, which we in-licensed from Targacept last year. Major depressive disorder is a common condition affecting approximately 42 million people in Europe, Japan and U.S.

First line therapy consists of SSRI or SSRI, though more than half of the patients failed to achieved remission in these therapies. (Inaudible) to the person therapies are clearly needed to complement existing drug approaches and this is why we see an opportunity here for 5214. Results from the 5214 phase 2 study were first announced by Targacept in 2009. That time they lift impressive result with 524 improving the Hamilton Depression score by six points more than placebo at eight weeks of treatment, but added to a first line SSRI. All secondary endpoints were also significantly improved and a good probability profile demonstrated.

Pending on this study, the first half of 2010, so the launch of our phase 3 development program with enrollment of the first patient in June. Three of the renaissance study to support the planet day filing has now started with the remaining due to start within the coming months. The U.S. submission is planned for the second half of 2012 with a marketing authorization application in Europe planned for 2014. The longer time scale of submission of Europe is due to additional data requirements for regulatory submission in Europe.

(Inaudible) the phase 2 study to explore 5214 as a monotherapy switch agent in patients with inadequate response to the first line therapy is also due to start shortly.

Finally, we turn to new opportunity in the respiratory inflammation therapy area, Fostamatinib or FosD, as we call it. This is a potential new oral treatment for rheumatoid arthritis, which we in-licensed from Rigel earlier this year. Rheumatoid arthritis is a very common joint disorder, affecting approximately one in 100 people worldwide. FosD is a next generation therapy being investigated in patients who have failed to respond adequately to first line therapies such as Methotrexate.

This slide shows some of the data from the completed phase 2 program. Studies show the similar effect to Methotrexate TNFalpha combination with the efficacy seen as early as one week of treatment. FosD was generally well-tolerated in the phase 2 trials, but this is something we will obviously keep an eye on during phase 3. The phase 3 trial program is due to begin later this year with regulatory U.S. and European filings planned for 2013.

So, while the first half of 2010 has seen progress across a number of our core therapy areas and global brand, the second half is likely to be up (inaudible). We will receive the outcome of five major regulatory submissions during this time. These include Brilinta, Motavizumab, Faslodex, and ONGLYZA-metformin in U.S. and also Seroquel XR for GAD in Europe.

We are planning on major submissions, these being Ceftaroline, Dapagliflozin, Vandetanib and ONGLYZA-metformin in Europe.

Finally, we present service phase 3 data on Dapagliflozin and get the first phase 3 data with Zibotentan.

I’m up counting (ph) the full R&D pipelines today, given this were carbon (ph) and depth at the full year, but as usual an update pipeline table is available at

So, to summarize, is in a bit the first half of 2010 with a quite a number of significant events still to come. While it’s not everything has gone according to plan during the first half of the year, on balance, we have made significant progress with many projects culminating in the positive Brilinta advisory committee yesterday. We hope to continue building on this in the second half of the year and we look forward to updating you on these events at the full year. And with that, I’ll hand you back to David.

David Brennan

Great, Anders. Thank you for that – thorough review of the later stage activities. Simon, thank you for your update as well. And what I’d like to do now is just invite everybody to start questions, some of you I think already know how. But let me just remind everybody on the telephone that you can press star one on your keypad and that will operator that you’d like to be called on for a question. And then those of you that are on the internet, there’s a box underneath the slides that you can type your question in and send them to us.

Question-and-Answer Session

So, with that I’m going to go to the first question up. It’s Tim Anderson. Tim, you’re on.

Tim Anderson – Sanford

Thank you very much. A couple of questions please. On emerging markets, how should we think about loss of exclusivity in that broad basket of countries? In the U.S., we have a pretty good idea of what generic erosion look like, same in Europe, but what should we expect from emerging markets? So, if we look at something like Nexium, should we just expect that to continue growing for the next many years despite generic interim established markets or they’re going to be some countries in the mix where a loss of exclusivity will be sold at some point over the next three to five years.

And then a question on M&A, there’s lots of press stories about Genzyme potentially being pursued by one or more companies and I’m wondering if you can say definitively that you’re not one of the companies in the mix and if you’re not in the mix, why not and can you remind us of where you stand in doing their transactions that could be in that $10 to 20 billion range.

David Brennan

All right, Tim. Good, thank you. Let me start with a bit on the emerging markets, I mean our emerging markets business as I said is the source of the significant proportion of our absolute growth first half of the year and that is due to the success of products like Nexium and Seroquel. Some of the products that I think are a bit more mature in the developed markets are now finding more success and opportunity in the emerging markets because in fact, there is a less of a generic curve you mentioned that comparison to the U.S. and we know it well.

I would say the U.S. is probably the most efficient generics market in the world, whereas a number of these others provide reimbursement levels that are a portion of the branded product when there has been a branded product. So, it’s difficult to say what the curve looks like broadly across all of them. I think it varies from place to place. Certainly, India is a very different type of market than China, but that kind of bridges for me into the branded generics discussion, which is well, we talked about getting products from other companies that we could potentially put our brand on and then move along.

The fact is in many of these markets, these products have already lost exclusivity. We’re marketing our brand that the branding that we do and the promotion that we put behind them establishes the brand and some of these markets are planning to give more exclusivity to newer products as they come on the markets. So, I think it varies from place to place and it causes us to invest as an appropriate and that’s due to our local success on the ground.

As it relates to M&A, I’m not going to comment about any specifics on any deals that are being potentially rumored in the marketplace. Our view on things as you may have heard before is that we’re opportunistic. We’re looking for opportunities with collaboration and cooperation for me tramps large scale consolidations. So, I’m not – I think we’ve concluded from a strategic perspective that scale in and of itself is not a compelling reason to go forward for some of these things.

I think we’re looking for smaller opportunities, new technologies, later stage products and intellectual property, things that are complementary to our existing disease areas. I’m not going to come up with a dollar number or figure is to what we are or aren’t willing to do, if there’s a business case we’re willing to do things, but our targets tend to be on the smaller side.

Tim Anderson – Sanford

Thank you.

David Brennan

Thanks, Tim. Okay, go to second question, which is Sachin Jain from Merrill Lynch. Sachin?

Sachin Jain – Merrill Lynch

Hi. Thanks for taking my questions. A couple of financial and a couple of R&D. First on the guidance, guidance since we last saw top line driven. I just wanted if you can clarify where there’s any margin uplift associated with that, I guess there isn’t a point (ph) of margins, which is directionally with the management of Nexium and Arimidex high margin products.

And secondly on the cash flow up the share buyback and you talk about the payment (inaudible) business cash flow, just wondering whether you could revisit balance sheet structure, what your thoughts on the net debt position over time particularly given recent events.

And then quick point blank questions, on Dapagliflozin, Anders mentioned EFG (ph), I guess the abstracts are up there. I wonder if you could comment on the couple of cases of upper urinary tract infection that have been seen, including it’s the first time we’ve seen that, and then the 48-week or 52-week data where there’s no real change in UGI rates.

And then one quick question on Zibotentan, I wonder of you could just frame the market opportunity for us and the first indication with the data coming towards the end of this year, particularly in reference to Roche’s comments on Avastin and the similar indication, they’ve kind of indicated potentially $1 billion market opportunity. Thank you very much.

David Brennan

Okay. Good, Sachin. I think what I’ll probably do is turn to Simon to cover the financial questions. It’s about guidance and the margin up with cash flow and balance sheet structure and then we’ll switch to Anders to comment both on Dapa and on Zibotentan. So, Simon, you want to start with the guidance and does it assume the margin uplift in or is it driven by the top line?

Simon Lowth

Sure. Well, I think on the guidance for the full year, in my remarks I indicated that the uplift is really due to a couple of things firstly and perhaps most importantly continued strong performance in the first half of the year and much of that was indeed driven by a strength on the top line relative to our initial expectations.

I also indicated that for the second half of the year, relative to our initial expectations. We see some upside coming through from later generic entry on Nexium and the pediatric extension on Arimidex. So, the uplift is principally from the top line, but we continue to drive our cost and productivity improvement program and you all has seen good cost discipline through the year and you can expect to continue to see that from us.

In terms of overall margin, I’d be guided that the pre-R&D margin level to be at the top end sort of midterm guidance range that very much remains our view of the year. And the only other remark I’d make on margins is just to reiterate a comment I made in my remarks, which is that I’d indicated our gross margin for the full year to be around about the first quarter level. We saw a bit of an uplift in the second relative to that, sort of 83 plays 81. But we view that down more to phasing in review mix, so I just reiterate Q1 margin, gross margin remains a pretty good indicator for the year.

Turning to your second question, Sachin, on cash flow, we as a company as you know very focus on driving operational cash flow from our business, we continue to demonstrate strength in the cash generation potential of the business. The (inaudible) the deployment of the cash and you get very straightforward and very clear, we’ve reiterated them a number of times. But, firstly, to invest in specific business needs and an investment to drive future growth and value. Secondly, repayment of our debt and thirdly, dividends, the residual of that – those three, if there’s residual cash from those three to return that to our shareholders over time through periodic share repurchases.

I think David touched on our priorities for the first of those uses of cash business investment. I mean very clear, we’re looking for value creating product and licensing and investment in our own R&D and smaller scale acquisitions that are consistent with our disease area in market strategies, very clear although (ph) that focus.

In terms of balance sheet, we got a schedule of debt repayment over the coming years. We identified a couple of repayment points coming up in the next 12 months in our release. Each time we face a debt repayment, we look at the economics of repaying or financing in light of credit cost and business shape (ph) will continue to do that as we move forward.

So, summary, pleased with the cash generation performance, focused on investing to drive future growth and value. We’ll repay the debt unless we see strong case for refinancing at the time, but we’ll take that each incident by incident. So, thanks, Sachin.

David Brennan

Good. Thanks, Simon. Now, I’m going to go over to Anders to take the question about Dapa and Zibotentan, and Anders just before you comment on Zibotentan, we have written question in as well from Craig Gascon (ph), which asks, “How does Zibotentan compare to the drug from Abbott as well, the drug that failed in development.” I think Sachin’s question was also – do you have any – can you frame the opportunity as it relates to Roche product. So, over to you.

Anders Ekblom

Okay, David. Thanks very much. Sachin, to your question on Dapa first. I mean he’s of course right that the abstracts are on then I would like to sort of start in them by saying I think Dapa represents a very sort of interesting clause and as you know it’s the first in the clause of this GMT2 (ph) compound. Then if you look on it’s sort of modality and it’s action, mode of action, I think it’s extremely interesting where they sort of non-insulin dependent mechanism because that means we can combine it with basically all treatments available today for type 2 diabetics.

And what is very good as you have seen in the data is that the glucose data are there. We also see a meaningful effect on blood pressure and weight loss. So, it starts sort of painting a quite unique profile for Dapa and then what is also very interesting is from the state (ph) to perspective, if you start with the incidence of hypoglycemia, it’s extremely low. It’s basically placebo lie (ph). The thing that your highlight is just of course around the frequency of, in the way genital and urinary tract infections and this is something we have been showing going forward that this is sort of a frequency, which is a bit higher than the competitors, but I think it’s important to understand that so far in the program they had been manageable and obey little clinical consequence for patients that also responding very favorable to the treatment.

So, I think we are now starting to generate long-term data as your highlight. We will sort of monitor that in the programs. You have to realize this is a program in progress, so we’ll update you on that sort of going forward.

With respect to Zibotentan, what we have provided in one of the slides that I showed today was the patient numbers for the various indications that we’re studying. That’s I think is a good indication for you on the market opportunity. I would not like to comment on any forecasting from a financial point of view.

When you come to the class of the Zibotentan per se, it is as you know Zibotentan is actually a more selective endothelin A receptor compound than Abbott’s compound, and we don’t see necessarily an increase in circulating endothelin-1 level, meaning that our compound doesn’t touch the B receptors. I think though it’s still early days and I think we have needs to see the data from both programs coming out and have a really full head to head comparison. So, I would be happy to come back to that when we see, as far as the data. So, back to you, David.

David Brennan

Okay, good. Thanks. I’m going to take a written question from Vishal (ph) at Media Partners and then I’ll go back to the telephone to Gavin Macgregor, but let me take this written one first. Should we expect any generic entry for Nexium in the next six months in Germany or France? And I think the question really gets at that issue, we talked about before, which is the likelihood of losing exclusivity, the timeframe within which can actually come on the market, get approved and get distributed.

So, we don’t have – it’s very difficult for us to give any insight into that. we know that of the major ten-year markets, where we had data exclusivity, there’s only been one approval and the U.K., there hasn’t been any product launch and there haven’t been any approvals in any of the other markets, but I think this is something that we have been trying to anticipate in our own planning, but it’s hard. Simon, you want to comment on that?

Simon Lowth

No, Dan. I was just going to say that building on that point. That was a whole range of different scenarios for timing of Nexium generic entry in Germany, France and indeed other European markets. We take account of those scenarios in our guidance and that’s one of the factors, one of several factors, which frames the range that we provide today.

David Brennan

Good. That’s good. And then there’s a second question from Vishal (ph), which is just, “If Brilinta gets timely approval from the U.S. FDA, do we issues in achieving favorable formulary status?” I think – certainly, our experience with the U.S. is that obviously players are challenging to make sure that products that they do put on formularies that are new need to demonstrate that they have a differential and a value proposition that makes good sense for that formulary that makes good sense for the players as well as for the patients.

And I think we believe that the profile that has come out of the PLATO study around Brilinta will make for a very good discussion with formularies as to why they can improve overall outcomes, reduce morbidity and mortality death rates in patients with acute coronary syndrome, if they have it available on their formularies. So, we’ll obviously be working hard to do that. I think the issues will be similar to the same ones we faced with other products.

Okay. I’m going to go to Gavin Macgregor with Credit Suisse. Gavin?

Gavin Macgregor – Credit Suisse

Thanks very much. Two questions, if I can. First one, emerging markets related and from that perspective, thinking about margin progression, which is obviously a major topic of focus and just coming back to how can you guys manage that and look to improve that over time, to what degree can you move cost space out, have you got plans to do that and what sort of impact might that have?

And then the second question is (inaudible) covered really around used of free cash, but you’ve obviously had favorable decisions with Crestor and now looks like Brilinta, which gives you nice cushion in the near-term looking out to one, two, three years. So, just sort of what was preventing you from going for a bigger share repurchase program in 2010 and maybe giving some guidance for 2011? Thanks.

David Brennan

Okay, good. Thanks for that Gavin. I’ll make a couple of comments about emerging markets and then turn it over to Simon, maybe he wants to comment on that. But I know he can comment on the share buyback free cash flow and he’s view on the impact that the Crestor and Brilinta decisions had on that.

I think our investment in the emerging markets is one that we’ve had in place for several years to establish in many of these markets a presence that will allow us to be competitive and when I look regionally across the world where we had made investments over the last five years, whether it’s Latin America, Asia Pacific, Center and Eastern Europe, the Middle East and in Africa and South Africa, we’ve got the second largest business pharmaceutical business there. what I see is that we have demonstrated that the investments that we have made can position us in the top two or three companies for growth across all of those regions, which I think speaks well to the plan that we’ve had in place as to how we want to invest the levels that which we would invest and then what kind of return we expect to get on it.

Margin progression – well, I’ll let Simon comment on that. We have – during our emerging markets stay back in March; we talked a little bit about what those margins are. But I would just say where we see an opportunity to invest that we think we can get a return in a relative good period of time then we’ll go ahead and make that investment because we know that this is a longer term kind of investment that we make. But, Simon, do you want to maybe comment on margin progression for emerging markets and what’s the opportunity to manage and improve or potentially take some things out.

Simon Lowth

Sure. Well, thanks, David, and for the question, Gavin. Okay, so emerging markets. I think when we had our session on emerging markets earlier this year, we laid out a chart, you may recall where we showed our emerging market country margins. So, that’s gravity minus cost of goods minus SG&A in the markets. For our portfolio of emerging markets versus more established markets, we showed that as a roundabout, if the established markets were the hundred, we said that the emerging markets back in ’04, we’re sitting at around about 55 and then we showed that more in the recent year was up in the 70 to 75 mark, so we’ve got a track record over the last five to six years of consistently improving our margins in the emerging markets.

Now, clearly, as we look ahead across all of our businesses, we continue to see players seeking more value and we see price pressures. We recognize that. We take out into account in the developing our strategies and our midterm planning assumptions. We’ve got many levers that we can pull to improve margins and/or counteract price pressures in all markets, but including emerging markets.

Firstly, we’re moving our supply chain increasingly eastwards and southwards to reduce the unit costs of producing our medicine in order to meet emerging markets.

In terms of SG&A, obviously when we’re in initial growth mode, we’re putting a lot of fixed cost ahead of demand as the markets continue to grow, they get sized, and we get more operating leverage, so second lever.

The third is by bringing together all of our commercial organization into a single global commercial organization. We’re getting much faster of best practices and ideas from our more established, more competitive markets into emerging markets the sales force effectiveness, some of the new channels that we’re deploying in the U.S. and Western Europe, we’re moving very rapidly into our emerging markets. And then thirdly, we’re taking infrastructure, for example, back office infrastructure in emerging markets that has been done historically in individual markets into regional service centers.

So, a number of levers we got to either improve margins or offset price pressure and when we set out our midterm planning assumptions of 48 to 54 pre-R&D margin that factored in a growing mix of emerging markets within our business and that was very much built into our forward look on margin. So, that’s on the emerging market sign. It’s a very important question and scenario that we’re very focus on as a business.

Turning to cash, and share buyback for 2010, we’re very please to double the net share repurchase program for 2010 and that’s a reflection of the strength of the performance of the business during 2010 and indeed, I think also improved by the successful outcome on the Crestor IP (ph) situation clearly helps. Start on 2010, please to double the returns, as we look forward, our policy remains the same. I mentioned it earlier, but again our first use of cash generated from our operations is value creating business investment, we then service our debt, meet our dividend commitment, and a spare cash, residual cash return to shareholders overtime to periodic share repurchases, that remains our policy and is also is our practice and custom, we update at the beginning of each year and we do so for 2011 and show you any plans we’ve got then in January.

So, I’m not going to make any toward statement on 2011 at this point. So, Gavin, thanks very much.

David Brennan

Good. Thank you, Simon. I’m going to take a quick written question then I’ll go to Gbola Amusa. But let me just answer, the question is, “Is the ONGLYZA-metformin (inaudible) in the EU, is that metformin extended or immediate release?” That’s an immediate release form of metformin. Now, Gbola, over to you.

Gbola Amusa – UBS Investment Bank

Question on China and one on Brilinta. Noticed in China, your second quarter growth decelerated to something like 27% from Q1, which I think was at 36%. How much of that deceleration is signal and how much is noise and when do you think that the NDRL additions last year, will start to affect your growth rate?

And then on anti-platelets, I was interested in feedback perhaps from Anders in terms of what doctors are saying, the box warning for Plavix means for off label use for Effiant or Brilinta, if approved and the non-Triton-TIMI 38 non-PLATO indications like peripheral artery disease, for example.

David Brennan

Okay, good. Thanks, Gbola. I think our business in China is strong. We’re not – well, it did slowdown. It had slow downed the fourth quarter, picked up again in the first. There are some fluctuations. We have increased our overall presence there in preparation for the regional drug listings for the four new products that we’re approved late last year, but they are just working their way through the more regional approvals and we think that we’ll start to see the impact of that in the second half of this year, but certainly n 2011.

So, we think that those four new products represent some nice opportunities to continue to grow our business and we’re not reading any signals into second quarter performance.

Anders, I think it’s best for you to handle your view of the potential implications of the box warning that’s in the Plavix label on potentially on Brilinta in those patient groups.

Anders Ekblom

Yes. Thanks, David. I mean I would rather sort of put some of the back to you Gbola in saying that as you heard yesterday and I must say, we’re very pleased with the discussion when we talked about the indication per se and as you could see, if you followed the ACS meeting yesterday, there was a lot of discussion when it was indication or several and actually our view is that they have this part of a continuum, but it’s still sort of under the same umbrella and that was where the advisory committee landed yesterday.

So, I think it’s too early to speculate on different aspects of the label. We will obviously with FDA going forward, but as you could hear, our decision on ACS as a disease and as sort of as one umbrella is where we would like to be and we’ll come back to this I’m sure when we have the more detailed outcome of the label discussion with FDA.

David Brennan

Good. Thank you, Anders. Thanks, Gbola. Let me go to Andrew Baum at Morgan Stanley. Andrew, go ahead.

Andrew Baum – Morgan Stanley

Hi. Good afternoon. Just a couple of questions. First of all, Zibotentan came from the same vintages (ph) that team in Recentin, which have made it in a meaningful way. Do you have any clarity on why Zibotentan failed to meet the primary end point to the phase 2 trial progression of free survival, just trying to get us more confident about why you think it’s going to meet the primary end points of the forward coming phase 3 trials.

And then second, on China, honestly, the Chinese authorities have increasing looking at the markups and pricings of pharmaceuticals, which indirectly have an impact on volume and prescribing and demand, particularly from western drugs. Do you see any risk of potential separation of the hospital budgets and prescribing that could negatively impact the current Chinese model for you and some of your peers?

And then finally, the PEGASUS journal is outlined yesterday’s potentially supportive as well as an expansion trial for Brilinta. Could you just outline the basic details of design and when you would hope to file that trial in both the U.S. and Europe? Thank you.

David Brennan

Good, Andrew. Thank you. So, in one minute, I’ll just flip back over to Anders to cover the reason why we have confidence in the program for Zibotentan given some of the phase 2 data as well as to comment on anything he might want to say about the PEGASUS trial on Chinese pricing. Significant portions of overall Chinese payment for the segment of the market that we work in Andrew are out of pocket payments by Chinese patients. So, we are in the primarily in the upper, the more premium side of the market for the Chinese.

So, I think there is obviously always a risk. on the other hand, I think that we have been able to price our products competitively there and be able to grow them and I know that having met with the government authorities there myself about the principles and philosophy they have on pricing, I think we are positioned reasonably well. I’m not sure what the risk of the separation of the hospital and the prescribing is – in the context of our business, but I’ve not heard it brought to my attention by the gang their as a particular issue.

Is Anders back on the line? I’m sorry. I know there was a connection problem. Anders, are you there?

Anders Ekblom

I’m here, David.

David Brennan

Okay, good. So, there was a question about confidence in Zibotentan and then the question about what can you describe about Brilinta in PEGASUS.

Anders Ekblom

Thanks, David. Andrew, with respect to Zibotentan, I think what is different with Zibotentan versus a couple of Plavix (ph) you mentioned is that we had overall survival, positive data already in phase 2, which is obviously a strength compared to where you normally would be with sort of good PFF date and in going for overall survival in phase 3.

But, I mean as you know oncology is a tricky area sometimes to predict, but I would argue that the overall survival in phase 2 is an advantage and then we don’t have to see what the phase 3 data means for us.

Andrew Baum – Morgan Stanley

My question is really –

Anders Ekblom


Andrew Baum – Morgan Stanley

Do you have any clear understanding why the progression fee (ph) survival end point was missed in that phase 2? Why did it?

Anders Ekblom

I mean, Andrew, phase 2 is phase 2. It’s exploratory and based on the data you have, you’re moving to phase 3. So, I wouldn’t like to proclaim a victory in anyway and claim absolute understanding. I think that was – it’s a mechanism that is of interest, that a good mechanism data behind it. But to provide absolute scientific clarity, that would be foolish to do that. So, I think coming back to it, we know we have good overall survival data, we just needs to see how it translates into phase 3.

David Brennan


Anders Ekblom

With respect to Brilinta, I would just say that as you heard as discussed yesterday, we shared the tape (ph) on the potential follow-up study and as you know we are of course in negotiations with the FDA on how to define studies going forward to further detail the advantages of Brilinta. And actually on one of the slides at the advisory committee yesterday, which was slide 118 for those of you who follow that, we talked about the large multinational randomized double blind study going forward in a stable coronary artery disease patient population and where we would like to see the advantage of treating longer periods because as you know from the curve on the (inaudible), they continue to separate even out sort of at the end of the trial. So we will have its come back to that, it’s a good vehicle for us to discuss with FDA and we will now sort of going into more detail discussions and come back to you, Andrew, at a later point on the absolute define (ph) and where we will do it.

David Brennan

And Andrew, one other point I recall the discussion when we look at Zibotentan going forward was the difficultly in measuring PFS in prostate cancer and I think I recall that it was confounded by both pain as well as elevations in PSA during the course of things, which may or may not be included in the scaling, but I am not absolutely certain on that. So we can have somebody get back to you on that.

In a moment, I will go to Marcel Brand but let me just ask Simon, there was a written question, Simon about would you repeat what you said about gross margin in the second half?

Simon Lowth

Facts are as follows. The Q1 gross margin was about 81%, Q2 gross margin was 83%, I guided in my remarks earlier, we still expect our Q1 gross margin around 81% to be the likely sort of outlook for the full year and that simply reflects the fact that moving from the 83% at Q2, we just expect as we see the revenue outlook for the remainder of the year, the pressure is particularly on drugs like Arimidex will have some pressure on the gross margin in the second half.

David Brennan

I am going to go Marcel Brand at Cheuvreux and then Andres, I am going to come back to you with a question about DAPA?

Marcel Brand – Cheuvreux

One broad question on price, the second question on Crestor, the planet trial data. First on price, I think the big surprise in the quarter has been actually pricing in the U.S. We see mix in price flat after a high single digit decline last year. We see Nexium with continued unabated price increases, even though there is probably a 30% of sales going to Medicaid where we expect significant rebates. And last year we saw Crestor without a price increase, probably based on prescription numbers and now we are probably up 10% in half year. Could you please explain what's behind the past pricing of the last two quarters and also give us an outlook?

The second question is related to Crestor. The planet trials, one or two, they suggest that you have a significant increase in side effects and renal side effects compared to Lipitor, we saw 4% versus 4.9% acute renal failures at least under the high doses in diabetic patients with pre-existing protein urea. So the question whether the U.S. label that says that's protein urea is of unknown relevance, whether that is going to maintain or what you expect to happen as a result of those trials that you have sponsored?

David Brennan

Okay, let me make a few comments about pricing and then ask Andres to comment specifically about the planet study, I am not sure we interpreted that data the same way. I think you are going to continue to see variations in pricing in the U.S. market based on the, as you cited the split of the utilization of the product in Medicaid versus Medicare versus the private sector of the market and whether it’s government reimbursement or private reimbursement. I think we have done a good job in maintaining the Nexium price in the face of increasing generic competition as well as over the counter competition, we expect to continue to see some erosion, the rate of which is probably more market determined than pre-determined from a forecasting perspective. I think the other thing you will see is that any price increases that we do take reflect the market opportunity as it relates to other competitive products within the markets.

So there are a number of factors within the U.S. market and quite frankly, the way we treat our Medicare book of business is different than our private book of business, which is as you said different than the Medicaid rebates, which have made up a significant part of the $300 million P&L loss we mentioned we have in our business this year because we do have a higher segment of Medicaid business with products like Seroquel and Synagis and we are paying a more significant rebate.

So I understand why you are asking the question but I think it’s very difficult to project this out further, there is a lot of pressure on pricing.

Anders, over to you to comment on the planet study.

Anders Ekblom

Thanks David. Let me first state that not surprisingly, I am not sure I agree with your analysis of the planet data. I mean the planet studies were designed to explore the effects of Crestor 10 and 40 versus (inaudible) 80 on urinary protein excretion in patients with Chronic kidney disease where it’s sort of high cardiovascular risk. And actually what we saw was that the main result from our point of view is that the Crestor 10 and 40 did not have a statistical significant change from baseline on protein excretion (inaudible) statistical significant reduction, which means an upside for them.

So the way we look upon the data is basically suggesting that there is no change with Crestor but there may be an upside for (inaudible). And I think that is the important aspect going forward and the second thing that I think you need to sort of keep in mind is that the planet started did not have a placebo arm and that means that that is tough to make a direct comparison on the EGFR, the (inaudible) mutation rate effect in similar patients, not receiving a statin. Well that means that we have compared our historical data and database for Crestor which is pretty extensive and we don't see anything of suggesting its effects.

So this is something we have shared with regulatory agencies, we are updating our safety reports in a normal. So I would argue and I would summarize it by saying we don't see any significant effect for Crestor but there may be something on the positive side for the comparator in that trial.

Marcel Brand – Cheuvreux

But the 4% acute renal failures, I mean this is a fairly high number compared to 1% and that was statistically significant. That is certainly something that keeps the Office of Drug Safety a little bit busy, isn't it?

Anders Ekblom

As I said to you, we are updating and we are in the dialog and you have to remember this is a small study in a selective population and you have to sort of put that into perspective when you get sort of the real numbers from a large population and our safety database now is pretty significant but that's why we are confident in the safety profile of Crestor and the safety updates have been sort of continuing in the normal pace and we have no signals when we put this in perspective suggesting any sort of negative outcome or planets for Crestor as such.

David Brennan

Marcel, thanks for the question. Anders, thanks, we are running out of time but why don't we try to take a couple of quick ones. Lorris Habring at SEB (ph).

Lorris Habring – SEB

Can you just remind us regarding this (inaudible), you mentioned $445 million in the press release, would there be any other charges against second half results, if that product would be turned down eventually by the FDA?

Simon Lowth

We did call that out as the intangible asset that relates specifically to Motavizumab and that would be the full extent of the impairment that we envisage, that's a pretax number and obviously the key decision point is the forthcoming FDA decision.

David Brennan

Last question, I think we will go to Seamus Fernandez at Leerink Swann. Seamus, are you still there?

Seamus Fernandez – Leerink Swann

I guess two questions. Can you just discuss for us how you would see the launch of Brilinta progressing internationally and in the U.S. given the slow launches that we have seen for all products globally in the last two years and maybe you can just give us a little a context around the issues that you are seeing with the Onglyza launch, you mentioned DDMAC historically etcetera, so maybe you can just give us a little context there. And then separately the second question, in terms of what inning you would say that you are in, I guess just using a baseball term there, you would say you are in on cost reduction, cost efficiencies. Do you really feel that a lot of the low hanging fruit has been pecked and now a kind of harder work is ahead of you or is there plenty to go from here?

David Brennan

I will try to explain to Simon something about baseball before he answers just in case, I am just kidding. On the launch of Brilinta, I mean I think we have seen slower uptick in some of these products that probably reflects the market as much as anything which is both access as well as affordability and demonstrated differentiation. As I said before, I think that the profile for Berlinta relative to the comparison to Plavix and the overall patient benefit both from morbidity, mortality is pretty significant. So we think that's very difficult for us to tell you what we think the ramp is going to look like. But we expect that the products can be successful global but it will depend on the label, it will depend on the timing, etcetera but I do agree with you, I think we have seen a shift in some markets on the uptick curve. Simon, last points on cost efficiency and where you think we are from a opportunities perspective?

Simon Lowth

I think we are in sort of day 3 of a test match, this is how I would describe it but I would also say that another test match will begin on day 6. This is not a journey that has an end, this is a process of continuous improvement and we are looking to drive productivity improvement across our business. But if you think just to trying to mention this for you, on the restructuring component of our cost improvement agenda, you will recall that we have outlined total benefits of the announced program to date of about just over $4.3 billion and we said with our full year results that we expect it by the end of 2010 to be at a total of $2.4 billion, hence my comment, we are about in day 3 of 5 day test match.

David Brennan

So, I think I am going to thank everybody for joining us today. It’s right on the hour, as said our first step performance, I think it demonstrates that we are going to continue to grow well ahead of the market with our key brands and the ones with market exclusivity and together with the strong performance in emerging markets as I said earlier, it gave us a very good start for the first half of the year. We know we have a more challenging second half ahead of us, there is some comparisons the H1N1 flu, more generic competition in the U.S. for things like TOPROL-XL and (inaudible) and Arimidex but nonetheless despite the headwinds, we are committed to doing our best, we have raised our revenue and core earnings guidance for the full year and certainly I think that demonstrates the kind of performance we want to put out.

So with that I wish you all good day and thank you for participating.

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Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to All other use is prohibited.


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