AstraZeneca PLC (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.

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