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AstraZeneca PLC (AZN)

Q2 2012 Earnings Call

July 26, 2012 7:00 am ET


Tony Zook - Chief Executive Officer and President

Julie Brown

Simon Jonathan Lowth - Interim Chief Executive Officer and Executive Director

Martin MacKay - President of R&D


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



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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 and 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 are being 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 target 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 a 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 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.

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