AstraZeneca PLC (AZN) Q3 2014 Earnings Report, Transcript and Summary

Good afternoon, and thank you for joining us today. I am Pascal Soriot, and I'm joined by Marc Dunoyer, our Chief Financial Officer; and Briggs Morrison, our Chief Medical Officer and EVP of Global Medicines Development. For the Q&A part at the end of the presentation, we will also have Luke Miels, our EVP of Global Portfolio and Product Strategy with us; as well as Ed Bradley, SVP of MedImmune Oncology on the telephone with us today. We will spend a short-time updating you on the first nine months and the progress we've made in achieving scientific leadership and returning to growth. I will then -- I will start by providing a brief overview of the key highlights. I will then handover to Marc for an update on our growth platforms and more detail on the financial performance and guidance for 2014. In addition, Marc will give a preview for 2015. Briggs will briefly discuss our R&D pipeline progress for the quarter and the expected news flow until our next quarterly conference call. I will then come back before opening the call for your questions. We have posted a set of slides on the Investor page of our website that will follow along with this presentation. We'll try to queue the slide numbers as we go through. Starting with our results for the first nine months, I'm very pleased to note that this is our third consecutive quarter of revenue growth. We had sales of over $6.5 billion in the quarter, which was up 5% at CER. During the first nine months, more than 50% of revenue originated from our growth platforms, which were up 16% year-to-date. And as Marc will discuss in more detail, we've increased revenue and core EPS guidance for the full year. This is the second upgrade to our guidance in 2014. Brilinta is showing good momentum across all regions, with sales up 78%. The highlights for our diabetes franchise are the successful launch of Farxiga in the U.S. as well as strong uptake of the Bydureon Pen, which we launched in the third quarter. Our respiratory business has had a good first nine months, and we've seen continued strong growth for Symbicort in the U.S. I would also like to highlight the third consecutive quarter of double-digit growth in the emerging markets. In particular we have seen 22% growth in China where we continued to outpace the market. Sales in Japan were stable in the first nine months due to price cuts and other market conditions, which we will discuss later in more detail. We've also made significant progress toward achieving scientific leadership in our core therapeutic areas. FDA approved Xigduo XR, which is the first fixed dose combination of a once daily SGLT-2 inhibitor and metformin. We received a positive opinion by the CHMP for Lynparza, olaparib, our ovarian cancer treatment for patients with the BRCA mutation. And we look forward to receiving European Commission approval in the coming months. We also have the U.S. PDUFA date on 3rd of January 2015. For Iressa, we received a label update in Europe to include blood-based testing for the activating mutation which renders patients eligible for Iressa treatment. In addition, the FDA approved Movantik, we believe this medicine has real benefits for patients, and we look forward to launching it at the end of Q1 2015, early Q2, after we receive the descheduling. Further, the EMA has adopted a positive opinion on Movantik for opioid-induced constipation. We've had Phase III data results for our gout therapy, lesinurad, and for CAZ-AVI, the treatment for intra-abdominal infections. Finally, we've seen significant business development activitiey supporting our strategic priorities. Turning to slide six, we see positive revenue growth for the first nine months at 4% at CER. Importantly, more than half of revenue, which equates to about $10 billion, was driven by our growth platforms, which have shown a strong good growth of 16% in the first nine months. Going by region, in the U.S., revenue is up 6% year-to-date. This growth was driven by Symbicort, Brilinta and diabetes. In Europe, the favorable growth of Brilinta and the diabetes brands were offset by the continuing impact of loss of exclusivity on Seroquel XR and price pressure on Crestor and Symbicort. Emerging markets was up 12% with growth in China well ahead of the market at 22%, which Marc will walk you through in more detail. And in Japan, sales were stable, impacted by the price cuts and the increased use of generics, in particular, in oncology. Core EPS for the group was down 3% at CER for the first nine months, as we continue to selectively invest in our growth platform and expanding pipeline. But as Marc will go on to discuss, we've upgraded our full year core EPS guidance. Slide seven is simply a reminder of our three strategic priorities. I believe we're making good progress on all of those priorities. On slide eight, we're looking in more detail at our five growth drivers. As I said before, they contributed about half of our revenue during the first nine months. On the right-hand side of the slide, you can see the relative contribution from each of these. It's worth noting that without the additional revenue from the acquisition of the BMS share of the Global Diabetes Alliance, our diabetes franchise still grew by 26%. I will now handover to Marc, who will take you through platforms in more detail and provide an overview of AstraZeneca’s financial performance for the first nine months. Marc, over to you.

Thank you, Pascal, and good afternoon, everyone. Let me start with Brilinta on slide 10. Sales were 127 million in the third quarter, up 68% at CER, with strong performance across regions. We saw continued good momentum in the United States, supported by the positive news of the U.S. Department of Justice closing its investigation. The U.S. was the fastest growing region in the third quarter. Europe remained strong with third quarter sales up 36%. The next big milestone for Brilinta will be the PEGASUS top line results, which we’re expecting early next year. As you can see on the left-hand side of slide 11, Brilinta is now the branded oral anti-platelet leader in U.S. hospital purchases. This had been helped by the new preferred status for Brilinta on the updated American Heart Association, American College of Cardiology guidelines for non-ST-elevation ACS patients. On the right-hand side of slide 11, we can see how we steadily continue to take market share in the United States, and the new-to-brand market share is now 7.5%. We have always believed in the potential of this product and are pleased with the steady progress it continues to make with ongoing investment. Let’s now move to diabetes on slide 12. We have seen strong performance over the quarter, driven primarily by the launch of the new Bydureon Pen device in the United States, and the good Farxiga uptake, also in the United States. For Onglyza, however, we have seen a small TRx share decline although volumes have been stable in a growing market. On slide 13 on the left, you can see that the Farxiga volume trends continue to grow steadily. On the right-hand side of the slide, we show the effect of the Farxiga launch on the monthly new prescription volume in the SGLT-2 class. As you can see, the volume growth for Farxiga is not coming at the expense of other SGLT-2 inhibitors. Instead, we see an acceleration of the overall class first Farxiga launch. Slide 14 shows on the left, the reversal of the slowing rate of growth for the GLP-1 class. During the last two quarters, we have seen an acceleration of the TRx volume growth. On the right, you see our Bydureon volume continues to grow, and following the launch of the new pen device, the early signs indicate additional volume growth. Looking at slide 15, you can see the impact of our new Bydureon Pen device, which it had on the prescription market share in the GLP-1 class on the left and NRx volume on the right-hand side. By now, more than a third of Bydureon prescription are with the pen, and it has led to a trend break in NRx volume increase for the total Bydureon family. Now moving to our respiratory franchise on slide 16. You see continued strong growth of Symbicort, with sales up 15% in the quarter. Symbicort performance was positively strong in the United States, with sales up 29% in the quarter. It should be noted that our realized net price for U.S. Symbicort has been stable in the third quarter and year-to-date. Sales in Europe were down 1% as price pressure was offsetting a 6% volume growth. Looking more closely at Symbicort performance in the United States on page 17. We can see new to combination therapy market share at 37.5% in the U.S., which is 3.6 share point increase since the end of last year. We estimate that around 40% of these market share gains are attributable to the Eisai formulary win, which kicked in at the beginning of 2014. Therefore, our gain this year will be a tougher comparison going into 2015. I’ve already mentioned our strong double-digit growth in emerging markets for the third consecutive quarter. If you look at slide 18, you can see how growth in China compares to the rest of the industry, with our growth, shown in purple, outperforming the rest of the market. I’m also pleased to say that our emerging market business is doing well outside China. In the third quarter, our ex-China emerging market business grew by 9%. Moving on to slide 19, in Japan, we see positive underlying demand for primary care launch brands in Japan: Crestor, Symbicort and Nexium, continue to post strong volume growth, as you can see on the left hand side of the slide. Despite a healthy mid single-digit in market growth in Japan, the performance has been impacted by the biennial price cuts and increased use of generics. Turning to slide 20, total revenue for the third quarter grew by 5% at constant exchange rate to $6.5billion, our third consecutive quarter of revenue growth. The currency impact on third quarter revenues was negligible. Core EPS for the quarter was $1.05 a decrease of 8% at CER. The impact of foreign exchange lowered core EPS by 5 percentage points at actual rates. On slide 21, I will now turn to the P&L for the first nine months and I will focus on core margin and profit. The press release contains the statutory numbers and a detailed reconciliation to the core measures. As a reminder, when I refer to growth rates, it will all be at constant exchange rates. Revenue was up 4% and core gross margin was 81.8% of revenue. Core R&D expense in the first nine months was up 14% reflecting our conscious investment in a rapidly growing late-stage pipeline. Expenditures in core SG&A were 14% higher than the first nine months of last year. Increasing spend was dedicated to the growth platform and supported the sales growth for three core franchises: respiratory, diabetes and Brilinta, of 31%. Part of the increase relate to the inclusion of 100% of the cost associated with the diabetes portfolio. Growth in core SG&A expenses also include the change to reporting around the U.S. Branded Prescription Drug fee, which will now account for current year fees versus previous year fees in past quarters. As we expect, 2014 fees to be higher than 2013 fees, which we have accrued for so far. We have made a small addition in quarter three, which goes through core SG&A. Core other income in the first nine months were 69% with milestone-related income related to the launch of Nexium OTC being the largest driver. Core operating profit in the first nine months was down 6% to 5.8 billion. Core operating margin was 29.6% of revenue. Finally, net cash from operations was 5.2 billion, thanks to the improvement in working capital despite a lower operating profit. As you have seen during this week we have signed and completed several new business development deals. As shown on slide 22, all these deals support our three core therapeutic areas. The divestment of Myalept, metreleptin, to Aegerion Pharmaceuticals allows us to redeploy resources in our core priorities while ensuring access of patient suffering from this rare disease. In the oncology field, the deal with Pharmacyclics and Janssen enable us to investigate novel immuno-oncology and small molecule combination in hematological and solid cancers. The acquisition of Definiens gives us access to novel predictive biomarkers, which we think can be important for immuno-oncology efforts. Earlier this week, we have also announced the closure of the respiratory deal with Almirall. It's a pleasure for us to welcome the highly regarded team from Almirall who will strengthen our respiratory franchise. Let me now turn to guidance for 2014 on slide 23. We now expect revenue for 2014 to increase in low single-digit at CER, which is an upgrade from our guidance at second quarter results. In light of the overall increase in revenue expectation for the year, we are accelerating our investments in our growth platforms and expanding pipeline. Therefore, core EPS is expected to decrease at around 10% for 2014, better than anticipated in previous guidance. And you should keep in mind that core EPS for 2014 at actual exchange rate is expected to be impacted negatively by currency by an additional 5%, assuming current exchange rates. This guidance assumes no U.S. Nexium generic in 2014. I would also like to point out the new guidelines by the American Academy of Pediatrics, which we expect to significantly impact Synagis sales negatively in the fourth quarter of 2014 and into 2015. Finally on slide 24, I would like to give you a preview of how we look at 2015. Our plan for 2015 is to continue to selectively invest in our growth platforms and accelerated pipeline while managing overall cost. Assuming current exchange rates, the company is targeting core EPS for 2015 to be no less than the lower end of the range of the upgraded guidance for core EPS for 2014 at actual exchange rates. Guidance for 2015 is expected to be provided with the 2014 results on February 5, 2015. With that, I will now hand over to Briggs.

Thank you very much, Marc. On slide 26, I think slide 26 is a great example of the continued momentum we’ve seen in our late-stage pipeline. On the regulatory side, we’ve recently received a positive opinion from the CHMP in Europe for olaparib in platinum-sensitive relapsed BRCA-mutated ovarian cancer. For Iressa, we have managed to obtain a label update, which includes blood-based testing for EGFR mutations to help identify patients likely to respond to the drug. In the U.S., Xigduo XR has been approved. This is the first once-daily SGLT-2 metformin fixed-dose combination. And last but not least, Movantik was approved by the FDA for opioid-induced constipation and received a positive opinion from the CHMP. As Pascal noted, you will recall that the rate-limiting step for the launch of Movantik in the U.S. is the descheduling by the DEA, which we now anticipate in the first or second quarter, early second quarter of next year. During the last quarter, we’ve also had Phase III data readouts from lesinurad as an add-on treatment in gout and for CAZ-AVI in complicated intra-abdominal infections. In addition, we’ve presented what we believe are compelling results at both ESMO and at ESC. The next major scientific meeting for AstraZeneca will be the American College of Rheumatology meeting, which is starting next week in Boston. On slide 27, you can see the key data that will be presented at ACR for our developmental drugs in lupus, rheumatoid arthritis and gout. In the near term, we anticipate continued strong news flow for several of our late-stage pipeline assets. All the data readouts and regulatory milestones are summarized on slide 28. Perhaps most notably we’re looking forward to the data from the two remaining brodalumab Phase III studies in psoriasis. This is a collaboration we have together with Amgen, and that data should read out before the end of the calendar year. On the lower part of slide 28, you can see a summary of near-term regulatory milestones we anticipate during 2014 and early 2015. More details on our pipeline transformation will be provided at our upcoming Investors’ Day. I’ll turn it back to Pascal.

Thank you, Briggs. In closing, I’m really pleased with the progress we’re making on our growth platforms and our pipeline. The growth platforms grew by 16% and contributed to over half of our revenue during the first nine months. We continue to selectively invest and support our growth platforms and our expanding pipeline. Despite this, we have managed to upgrade our revenue and our core EPS guidance for 2014, and we confirm our progressive dividend policy moving forward. And actually we have provided a preview for our core EPS in 2015. Thank you for your time today. I hope to see many of you at the Investor Day later this month, where we’ll be providing further detail on the execution of our strategy. So I hope you understand that we may not address all the aspects of our pipeline today. We want to spend more time on this at the Investors’ Day. With that, I would like to now open for questions. Over to you, operator.

We have a question from Alexandra Hauber at UBS. Alexandra, do you want to go ahead?

So I had three questions. The first one was on Symbicort. You’re having very strong volume growth at the moment, but that we expect to slow given that you will be excluded next year from the CVS Caremark formulary. However, that’s only about 20% of life science spend and your volume growth is currently exceeding that. So would it be correct to be relatively confident that there is still volume growth for Symbicort? And would you be prepared to tell us whether you think pricing is going to be positive or negative in 2015? The second question was on something that hasn’t happened yet, I’m aware a lot of things have happened at AstraZeneca this year and that essentially an Epanova launch despite the fact this was approved about six months ago. So are you still committed to launch it at all or may we see something similar as what we’re seeing today for metreleptin? And then the third question is what is so proprietary about the Definiens technology that you felt that you had to own it rather than just license it?

Okay. Thank you, Alexandra. So we have Ed on the phone. And I’ll ask Ed to cover the Definiens question. Let me start with Symbicort. Just a high level, we should expect price pressure on Symbicort next year and some volume growth. But maybe, Luke, do you want to cover this in more details on Symbicort U.S.?

Alexandra, thanks for your question. I think the growth that we’re seeing this year should not be extrapolated into 2015. I think it reflects access and commercial success. Next year, we do expect much lower growth based on a mixture of access changes and pricing pressure.

Net-net is you will see some growth, but it’s only as you could expect lower than this year, Alexandra, because the market is changing. As far as Epanova, we are still committed. We had to address some manufacturing and supply issues, and we prioritized the supply to our STRENGTH study, which has now started and has started enrolling patients. So our priority was to supply the study, number one. Number two, for the time being, we want to focus all our efforts on growing our diabetes franchise, still defending Crestor and then growing Brilinta. And of course, the sales force that will be promoting Epanova is the sales force that is today engaged in our diabetes franchise. So it’s more a question of priorities, first of all, supply going to the study and then, secondly, the priorities around our sales force. But we are still committed, and you'll hear back from us at some point as far as Epanova. And Definiens, Ed, if you are online, do you want to cover this question?

Sure. Thank you, Pascal. Yeah, so Definiens is a very powerful and proprietary integrated platform for core Tissue Phenomics. It does two things. It has very sensitive tissue imaging, which enables us to look at multiple markers to identify all of the immunocytes, immune responsive cells in a patient's tumor, and it also enables us to see exactly what the relationship is to the tumor cells and whether they're killing them or not. And it uses very powerful computerized algorithms to make millions of correlations in any individual patient to see exactly what cells are responsible for killing tumor cells. This is applied in clinical trials, and it enables us not only to identify future biomarkers that might be useful, but also enables us to make rapid decisions in the ongoing development of clinical drugs and particularly in combinations that we need to explore.

Thank you, Ed. What about -- next question is from James Gordon at JPMorgan.

Hello. Thanks for taking my questions. This is James Gordon from JPMorgan. I had a couple of questions on Nexium and the U.S. generic situation. My question was I've seen that Ranbaxy filed a statement stating that their tentative Nexium ANDA approval has been rescinded. It doesn't say whether they forfeited their eligibility for 180 days exclusivity. So a couple of questions on that. One was, what's your understanding about if the Ranbaxy 180 days is rescinded, does that mean immediately that multiple generic companies could come to the market with a generic Nexium? And also just how do you think it works in terms of does anyone else think at 180 days or is it a complete free-for-all?

It's a great...

[Indiscernible] question. On the partnership I saw where you're partnering your PD-L1 in combo with ibrutinib, have you already seen any encouraging data for PD-L1 in hematological cancers? And assuming you have, when can we see some data on that?

Okay, James. Thank you. So on PD-L1, I'll ask Ed as well to cover this question. But starting with your Nexium question, I have to say it's a great question, and to be totally candid with you, we are not totally sure how to read this Ranbaxy announcement. So I think we'll just have to wait and see how these discussions with the FDA develop and what that means as far as Ranbaxy and potentially other generics being launched. Maybe a couple other things I could say is one is our assumption is that it still remains that there will not be any Nexium generic being launched this year. And the second point is so far there's no other generic that has been approved, so to keep this in mind. And as far as Ranbaxy themselves, again to be totally candid, we don't exactly know how to read this announcement, and we'll just have to wait to learn more about it. Ed, do you want to cover the PD-L1 question?

Sure. Thank you. Yes. There is a lot of preclinical data that supports the activity of the PD pathway inhematologic malignancies. We have trials that are ongoing. It's too early to discuss any data from those, but we're enthusiastic about that and also about the combination with ibrutinib.

Thank you, Ed. Tim Anderson at Sanford Bernstein. Tim, do you want to go ahead?

Yes. Thank you very much. So a question kind of like the one you got on Symbicort, but really on the diabetes franchise, I'm wondering if you can talk about pricing and market access, especially in the U.S. with your diabetes products, whether that's Onglyza and Bydureon or Forxiga, given the fact that we've seen price compression in diabetes. And then on Onglyza specifically, can you update us on the possibility, kind of where you are with the FDA and the heart failure risk? And do you think the FDA is waiting for the PCOS trial with Merck before they make any decisions? And then last question on 2015, the thoughts, guidance on earnings, can you speak to the tax rate side of that? For the last two quarters this year, your tax rate has been lower than consensus has expected.

Okay. So thanks very much, Tim. I'll ask Marc to cover the tax questions. So just a good comment, I mean we've had a number of one-off events this year that you shouldn't necessarily assume will translate into a similar effect next year. But I'll ask Marc to comment in more details. Should we start with the CHF question? Briggs, do you want to cover this one?

Sure. So, Tim, again, just to be very clear on the Onglyza data, the overall cardiovascular safety is comparable to placebo we saw in SAVOR. It was a difference in hospitalization for heart failure, not in total congestive heart failure. And obviously, we've submitted that data to regulatory agencies. We'll have to wait and see what comes out of the Merck PCOS trial, but at this point, we have not had any significant concerns from regulators.

Thanks, Briggs. As far as the other question on diabetes, I'll ask Luke to add anything if he wants, but maybe the general comment I would make here is that whether it's in diabetes field or respiratory field, we expect an increased competition and some products will be impacted by price pressure more than others. We don't really want to comment on one product to another. Maybe the one thing I could tell you is that for 2015, across the entire portfolio of products, across our entire business, if you want, in the United States, our assumption is we will see a negative price impact in the low-single digit. That's across the entire portfolio. And we're not going to comment on product by product, as you can imagine, for commercial reasons. Luke, anything you want to add?

Yeah. I would just make an overall comment. I think we have a competitive portfolio. We have Xigduo, of course, with we think an attractive label. We have the Dual Chamber Pen, of course, and, in the mediumterm, compounds like saxa/dapa.

And, by the way just to add, our 2015 preview assumes these increased price pressures across the portfolio. And we've built in the low-single-digit price reduction across the portfolio that I've just mentioned a minute ago. So moving on to the tax question.

Thank you for the question. I think we will be in better place next year, in February, to provide more details about our assumed tax rate for 2015. Where we sit today shouldn't be dramatically different from where we were last year or this year. It should be in the same region. But we would like to provide you with more detailed information when we meet with you in February.

Okay. Thank you, Marc. Sachin Jain at Bank of America. Sachin, do you want to go ahead?

Hi. Thanks for taking my questions. Three, please. Firstly on cost base progression and two aspects. First, can you just give us some color on what you're expecting for fourth quarter given the 2014 guidance, basically implying the fourth quarter earnings down 20%, 25% sequentially on 3Q without generic Nexium, so any color on that? And then any color on cost base into 2015 and what flexibility you have around potential Nexium U.S. generic timing? Second question is on balance sheet intention. Given comments from the media call that less deals are needed given pipeline progression and, as you move towards a net cash position at some point next year, what's your intention for balance sheet? And then the third question for Ed on I-O, just a very broad question. What data should we expect from the portfolio of assets by year-end given multiple potential for data being ASH, San Antonio, and the Analyst Day? Thank you.

Thanks, Sachin. So, Ed will cover this question in a minute or two. Maybe I could start with the cost base and ask Marc to add on that and also cover the balance sheet question. The cost base, we continue, as we said, we will continue this year to invest in our growth platforms. In fact, this year, you should see 2014 as really an investment year, almost a launch year, a year in which we are launching several products. And I will call the emerging markets a product, if you want. Essentially, we are launching quite a number of diabetes products. We are still re-launching Brilinta and the good news is we are starting to see momentum there, including in the U.S. We are sort of re-launching still Symbicort with great results. And finally, we are launching China. In fact investment in China this year has been very substantial. We've increased the size of the sales force very substantially and the result is what you see, a growth rate that is very, very substantially above the market growth rate. But that is to be considered a launch year. Next year, we move to a different phase where we still have launches, of course, we have olaparib but it's in oncology. It's much less costly and we get to a more stable phase of our business. So next year, you should assume we still invest in our pipeline, but certainly we will start managing SG&A costs and improving productivity and certainly looking for synergies across the entire sales force and managing that cost base. And that's why we feel comfortable delivering or giving you today this preview as far as 2015 core EPS. Nexium, the assumption we shared with you is that we don't expect any generics this year. In terms of additional assumptions supporting the preview, we'll share those with you in February, so if you don't mind waiting until these full-year results. Marc, do you want to cover the balance sheet question?

Yes, I will try. So first of all, in terms of balance sheet, let me talk a little bit about where our financial commitment will be for next year. Obviously, we will continue with our progressive dividend policy. We will continue to spend money on CapEx and externalization. As we are today, our gearing ratio or leverage is relatively limited, so I do not expect any evolution or big evolution on the leverage on the gearing itself. So our balance sheet should be more or less what it is today. There shouldn't be a major impact on the balance sheet next year.

Thanks, Marc. We certainly can have more discussion in our Investors Day on that topic as well, how do we intend to deploy our capital over time. And, Ed, do you want to jump in and cover the I-O question?

Thanks very much. No. We could talk a lot about this. Just very, very briefly, the I-O programs are very broad now and moving very rapidly ahead. Just to highlight a couple of things, the registration files, ATLANTIC and PACIFIC, are moving ahead very well. The combination trials will start as soon as the dose and schedule is finalized, which should happen very shortly. Those combination trials are going very well. I should just mention a number of other combination trials that are progressing in the IMT area with tyrosine kinase inhibitors, for example, with PD-L1 and OX40 and AZD9291 and with vaccines. So there is a lot of activity for those. So the program is moving ahead very, very well. For sure, there will be detailed updates at ASCO. And I don’t want to go into much more information about specific conferences where data will be presented but it will be.

Thank you, Ed. Let me move to Nicolas Guyon at Morgan Stanley. Nicolas, do you want to go ahead?

Yes, hi. Thanks for taking my question. I have two, please. The first one is on PD-L1 certification. It seems that there is a growing consensus about the need to standardize PD-L1 tests and get off of PD-L1versatility. Could you remind us which assay and cutoff you are using or at least tell us how it compares versus Merck’s 1% cutoff and Roche’s 5%? And the second question is about emerging markets in China. I saw another strong quarter of China and now represents 30%, 40% of emerging market sales. What are the latest developments there? And do you see any risk of being so dependent on one single country? Thank you.

Thanks, Nicolas. Maybe I will cover the emerging market question, and Ed can cover PD-L1 in a second. We see strong growth in China, but as I mentioned, we also see good growth outside of China. We see a growth of about 9% outside of China. We’ve seen very strong growth in Russia in the recent months, in Brazil, in a variety of other countries. We are now also investing in Africa, which we see as a substantial growth potential. So it’s not -- our emerging market story is certainly very much driven by China, but also by the other countries. It’s not a China-only story. As far as China, so far, we don’t see any substantial change. We have to accept that certainly the growth rate we are experiencing this year is very nice to have, but probably cannot be sustained at that level forever. So if you move into next year, we are assuming a growth rate that it would be a little bit lower than what we experienced this year, but certainly still very healthy and we’re still aiming at growing faster than the market in China. But again, growth in – we’ve seen very nice pickup of growth in Brazil. We’ve refocused our business behind our priorities. We’ve increased our investment in some places and really nice development both in Russia, Brazil, and many other countries. Ed, do you want to jump in with the PD-L1 question?

Sure. And I wasn’t able to hear all of the question, but I think it referred to the PD-L1 assay. We are in a partnership with Ventana, and it is delivering a fully validated companion diagnostics that are implemented in the clinical trials. The cutoff is based on data, and we’re using that in prospective trials moving forward.

Nicolas, did this satisfy your question or...?

I mean could you provide any figure for the cutoff that you are using?

We are using -- actually, Ed.

So there are a lot of technical details that we’ve not disclosed. It is data based, it is fully validated and it’s incorporated into the ongoing clinical trials.

Okay. Thanks, Ed. We move to Dani Saurymper at Barclays. Dani, do you want to go ahead?

Yes, and good afternoon. I had a couple of questions around other operating income and particularly as it relates to 2015 in your guidance that you’ve provided. Can you confirm that the Myalept divestment of 325 million will be going through core operating income? And can you provide any other additional one-time income that you’re anticipating within your guidance for 2015? I’m conscious that Nexium OTC has sales milestones potentially payable up to $300 million. And I wanted to know if you were making any assumptions around receipt of those in 2015? And then two other things, if I may, just if you could come back to your assumption around generic Nexium launch in 2015, is it a conservative assumption? I appreciate you’re not disclosing this today but is this as of January? Or are you assuming something around mid-year? If you could just provide a little bit more flavor to that. And then just lastly, you are presenting data on sifalimumab and anifrolumab at ACR. Have you made a decision to move forward into Phase III with either of those assets?

Good. Thank you so much, Dani. I’ll ask Briggs in a minute to cover the sifalimumab question and, Marc, you could cover the question about Myalept and others. I’ll just maybe cover the Nexium OTC launch, as I said, the assumption we are disclosing is that we assume no Nexium generic launch this year. As far as the other assumptions, we will share this in February when we meet. Maybe before Marc covers this Myalept question, just a general point that we have a business model that is focused on the three core therapy areas and in oncology, in cardiovascular and metabolism and in respiratory, we basically have decided that by and large we will develop and commercialize those products by ourselves. And maybe that here and there we have a collaboration or partnership but by and large we want to do the development and the commercialization ourselves. But we also have very good scientists, very good science in what we call the opportunistic therapy areas of -- sorry, anti-infectives, but also neurosciences. And so for instance, in neurosciences you so that we have a BACE inhibitor. We have decided to partner this one because we think we cannot do this ourselves, we don't have the resources, we don't have that capability, so we partner. You probably also saw that the FDA gave us fast track designation for two monoclonal antibodies, one for the prevention of Pseudomonas infections, the other one for MRSA, and those are two very exciting assets coming out of very good science in our labs at MEDI in that instance. Here again, we'll have to look at how do we go to market with those products. They are important to patients. We may partner them. So the point I'm trying to make is we have two parts in our business model. One part is we do ourselves, the other part is we partner or license out. But we keep the innovation engine to generate value for patients and value for the company. And we may redeploy this innovation engine to ourselves in the years to come at some point. But in the meantime, these innovation engines will generate value for the company and we recognize this value as part of our ongoing business model. So sorry, but sort of a long a introduction but, Marc, do you want to cover the specific question?

So just to answer your question directly, yes, the revenues we're going to generate from Myalept are going to be booked as other operating income. But just want to maybe adjust the figures. The amount of 325 million obviously will not flow directly into the other income since we have on our balance sheet an intangible of a bit more than $100 million, and then we also have to pay some tax on this transaction. So the net effect on the other income would probably be slightly higher than $100 million. And to answer your second question on the OTC next year on U.S. sales milestone, the answer is yes. This milestone is assumed to be received over the course of 2015. So it is accounted for in our planning assumptions.

Thanks, Marc. Briggs, do you want to cover the last question?

Dani, if you'll remember, we had a little further description of our pipeline update at the first half. We show you the pivotal study starts, the pivotal study decisions and pending decisions. So the pending decision in that category was which of the two molecules we would take into Phase III. We have not made an official decision yet to progress that program into Phase III.

Thank you, Briggs. So, Mark Clark at Deutsche Bank. Mark, do you want to go ahead?

Yes and good afternoon, gents. A couple of questions, firstly, I wonder if you could just give us slightly more explanation as to what exactly is happening with the RSV change in recommendation and does this have any implications to your development of follow-on products. I see there are a couple in early development. In other words, does it sort of remove the attractiveness of the market? And secondly a question for Marc on accounting on Nexium. As I understand it, you moved to a sort of accruals basis of accounting on Nexium the day generics launch. And that presumably would also involve some write-downs on inventory, et cetera. In the event -- I know it looks unlikely today, but in the event that the FDA rushed to approved generics and we had generic launches before the end of this year, would that change your guidance? Thank you.

You mean, I assume, Mark, you mean the guidance for next year or do you mean for this year?

For 2014. And 2015 would probably not change a great deal.

Luke, sorry, do you want to cover the RSV question and then, Marc, you take the other one?

Sure. So I think based on past experience when we had guideline changes in 2009, we do clearly expect this to place pressure on volume. This is driven by payers adopting the guidelines, and that tends to happen relatively quickly. But we are midseason, so it may take some time. Just like to mention that these guideline changes are inconsistent with our approved label and we believe they're not in the best interest of patients, and we'll be working with stakeholders to seek the best outcomes for patients. But I think Q4 and Q1 are historically the stronger months for this product, so we'll have a full picture at the end of the year.

Yeah. Over time, Mark, we'd expect that will play out over a period of time. But you should assume that the volume of synergies we'll basically halve will be reduced by 50%, simply because these guidelines really reduce the volume use, and they tend to be very well followed, so we certainly expect a substantial impact. As far as the development of our new products, this is not changing anything. We basically are proceeding and if we have strong clinical data and a differentiated product that can create value, we'll go to market with those products. We could talk about these products actually at the Investor Day because those are quite interesting products. Should I move to Keyur Parekh? Keyur, do you want to go ahead, at Goldman Sachs?

Sure. Thanks, Pascal. I have kind of two broad questions, first, on accounting. Marc, if I could just understand more broadly kind of how you differentiate between items that are core and items that are non-core. It kind of appears that the milestone that you guys paid tend to move to non-core and milestones you guys received tend to be included in core incomes. So if I could just get a broad sense of how you evaluate those decisions that would be helpful? And then, Pascal, secondly, as you think about the R&D budget beyond 2015, you will have a lot of the immunotherapy programs would be in full swing in ‘16 and ‘17. Just if I could get some sense of what it is, how should we think about the ramp-up of R&D costs beyond 2015 that would be helpful? Thank you.

Yeah. First of all, I should apologize to Mark. We didn't cover the second question, actually. Sorry, Mark, about this. But, in fact, our Marc here could cover Mark's question and also Keyur's question at the same time. Do you want to cover both?

I'll try to do it in sequence. For the first question, which was basically the impact of introduction of the generics in the U.S., so, first of all, there are two impacts. The first impact is on any possible inventory that would be in the channel. But this inventory is not very large. And as we come towards the launch of a generic, we tend to reduce the level of inventories. The larger impact is on the accrual of the rebates. That's where the impact is larger. And as you have noted, when we arrive in the generic era, then we tend to take the accounting in a different manner to avoid any further impact on our accounts. Regarding the guidance for 2014, the guidance, what we have revised today, take into account no launch of generic in 2014. So conversely, you asked me if it was launched earlier, would there be an impact? The answer is yes. But this is not our assumption today. And let me address now the issue of the core versus non-core. We have a convention, which we have adopted years ago, which is basically very close to what other of our peers in the industry do, and we do amortize our intangible for non-core. We do exclude from this the impairment and amortization on non-IT assets. Some other companies do include them. We exclude them. And the rest is the global restructuring program, which we feel would unbalance the underlying results. So basically, we take those out and put them in non-core. And then the last question was on the evolution of the R&D 2016 versus 2015. We believe that the R&D are going to remain at a high level, but they should abate a little bit in 2016 versus 2015.

Thanks, Marc.

So if I'm hearing you correctly, 2016 R&D should be lower than current 2015 R&D. Is that a correct interpretation of what you've just said?

Right. Actually and I don't think you should necessarily assume today would be lower.

I think it will also depend on the progression of our programs and everything. So we are not providing guidance for 2015 today. We are certainly not providing guidance for 2016. But you're asking me whether they're going to remain at high level I think the answer is yes.

Thanks, Marc. So, Jo Walton of Credit Suisse. Jo, do you want to go ahead?

Thank you. A couple of product-specific and a couple of broader ones, on the product-specific, you've now bought the Almirall respiratory products, and I believe you have the right to opt in if you want to in the U.S. Would it be reasonable to assume that you would start to take a role in the promotion of aclidinium in the U.S.? And you've made a comment that you're expecting low single-digit negative pricing in the U.S. for next year, which is presumably a bit more of a headwind than you've had in this year. Would it be fair for us to assume that that is the price that you have paid, broadly speaking, so that in all of your major categories excluding Symbicort, where we know that you will be excluded, for your diabetes products, et cetera, for everything else, we should broadly assume the same sort of access to formularies for 2015 as 2014? And my other couple of questions, just a technical one on the cash flow. Very strong working capital in flowin the first nine months of this year, is that something you can sustain for the whole year or is that just something which will reverse, it's just a timing issue? And a final broader one and I know it seems to go back to this concept of your guidance for next year. But I'm a little bit confused. You appear to be saying that, broadly speaking, your earnings, all other things being equal, should be roughly flat for 2015 over 2014. And yet in 2015, presumably at some point, we would prudently assume some form of Nexium. We may see some form of Pulmicort. So we know that we’ve got a tougher period for Symbicort and with Synagis. Is there really so much fleck in your costs that if we collectively assume some small reduction in underlying sales, you can make that up and that there really is an ability to take out SG&A so that we can still have flat sales against declining -- sorry, flat earnings against declining sales?

Okay. Thanks, Jo. So let me cover a few questions, and I’ll leave the rest to Marc. Almirall products and the U.S., it is a consideration indeed. But with these kind of issues, you always have to be able to come up with something that makes sense for everybody. But certainly something that we might consider. For the time being, we’re very focused on launching in Europe and looking at how we can leverage this franchise in the emerging markets as well. As far as your question about the price -- pricing in the U.S. and access, I think, first of all, when you say we’re going to be excluded in Symbicort, there will be access changes in the U.S. in 2015. There is no doubt. But we certainly will keep trying our best to improve our access or reverse the difficulties, the challenges we are facing. But certainly overall, you’re absolutely right to say the access will become more challenging. And there will be a price impact, which is the price we’ve built in. Of course, diabetes, we don’t expect specific issues, we don’t expect new specific issues, but suddenly again, an increasing price pressure for these products. And again, that’s why overall across the portfolio we assume a low single-digit price decline. And finally, the guidance, I think you should see that our growth platforms are growing. So we certainly are expecting sales growth from those even though we are losing Nexium next year, number one. And number two, we certainly will manage our costs appropriately next year, as we said before. And I guess I’m not sure what else I could tell you. Of course, you might wonder -- you might question our preview for 2015, the only thing I would tell you is so far, we’ve done what we said we would do, and we’ve said we are going to manage our investment and our cost base to be able to deliver the core EPS we’ve guided to. Beyond that, it’s kind of hard to be a lot more specific. Marc, do you have anything you want to add?

No, so first of all, your first question on the cash flow, I think when I presented to you I think it was in February of this year, I mentioned the focus that we would have on the cash conversion cycle. I think some early work has provided very good results, on the payables, on the receivable as well as the inventories. So we will continue with this effort, which has already, as I said, produced some good results. We will continue with this effort over the following years. So there should be some continuation of that in the coming years. Regarding your question on, can you manage you costs, in a declining sales environment, the answer is yes. We need to provide enough ammunition to our R&D pipeline, and therefore we will look at our cost base as we have done in 2014 and 2015. We’ll continue to do that. We’ll try to redeploy as much as we can. We have seen today that we have announced the divestment of Myalept. This has been to help to a small extent. So basically we look at our cost base and we’ll monetize assets or partner assets when we can’t develop them on our own.

Thanks, Marc. Seamus Fernandez of Leerink. Seamus, do you want to go ahead?

Thanks very much for the questions. Maybe just as a first question. You talked a little bit about Epanova, just update us on what your hopes are from a 38,000 patient study and what the investment and costs are relative to that study, particularly in the context of meaningful other advances occurring outside of the space with PCSK9 inhibitors, in particular, as a potential challenge as well as just sort of the payer cost environment. Just trying to understand that particular investment. Second, Pascal, you’re getting lots of questions on the sort of leverage opportunity year-on-year. As we think about business development, it seems like you do have good balance sheet flexibility. In terms of an interest or a willingness to do potentially larger acquisitions that leverage your current and existing cost base, would there be a willingness to consider those types of transactions in the 2015-2016 timeframe? Thanks so much.

Thanks, Seamus. Epanova, I think it's important to keep in mind that the PCSK9 certainly would be a substantial improvement, but we believe there will remain a risk associated with triglycerides and of course, we have to demonstrate this, and that's the goal of this study. We're not the only people believing that it could be the case. If you look at the steering committee of the study, it includes some of the most prominent, most important opinion leaders in cardiology and epidemiology around the world. So those experts believe in the possibility to show a benefit by reducing triglycerides. Now, of course, we are in a risky business. We never know whether our study will be positive or not. But if it is positive, it will actually be the only treatment that has demonstrated cardiovascular benefit from the reduction of triglycerides. So that's essentially what we are hoping to demonstrate with this program. As far as the balance sheet opportunity, yes. I mean, essentially, what we've done so far is focus on building our three core therapy areas and, in fact, as Marc said, monetizing some of the non-core assets and also turning the opportunistic therapeutic areas into another business model, so we have two business models going. So it's really been based on small to mid-sized acquisitions or partnerships. But having said that, if we did find the right opportunity that would lead to a larger transaction, we would also consider it. But the key is, as we've said many times before, including in the discussions we had with another company not so long ago, the key for us is always, do we believe we can execute, do we believe we can create value, do we believe there is a strategic value in the merger, can we add value, is there a synergy, and can we execute without distracting the focus on the pipeline. So those are the conditions that are hard to meet, I must say. But if we were able to find an opportunity addressing those and we could create value for our shareholders, we would definitely explore it. So I move to Mattias Häggblom at Danske Bank. Mattias you -- it's an email question, sorry, so I'll read it for you all. So the question Mattias is asking is, can we assume we will update -- you will update the market at the Investor Day on your progress towards 2017 and 2023 targets that you shared earlier this year, or should we see two targets as extraordinary events in light of circumstances around your company earlier this year? No, the answer is a very simple yes. Our targets remain our targets. We are still aiming at 2017 sales in line with 2013 and we still are aiming at the 2023 sales forecast that we communicated earlier this year, which actually by the way it was not in light of circumstances. It was actually based on a long-range plan developed several months before, just as a quick reminder for everybody. So no, those targets are still very much part of what we're trying to achieve. Steve Scala at Cowen. Steve, do you want to go ahead?

Yes. Thank you. I have three questions. First, a clarification on the 2015 guidance. You said that 2015 will be no less than the lower end of the range of the updated guidance for 2014. But 2014 guidance is a single point. I'm sure I'm missing something, but would you please clarify? Second, would you please update us on the status of Symbicort generics in the EU? And then lastly, Lilly said on its Q3 call that the AstraZeneca BACE inhibitor had the opportunity to be differentiated from the Merck BACE in part due to different chemistry. Unless you'll detail the differences at the analyst meeting, I'm wondering if you could amplify on these differentiating features now. Thank you very much.

Thanks, Steve. So BACE inhibitor, maybe what we could do is cover this at the Investors Day because I'm reminded here that we are running out of time. So Marc, you could cover the overall guidance in a minute. I'll just cover quickly Symbicort EU analogues. We are basically seeing the introduction of Symbicort analogues across Europe, that continues. This year it had an impact on price. As you saw, we grow volume by 6% but declined in turnover by 1%. So it's only a price impact. And next year, we expect to continue the negative price impact from the introduction of those analogues. The one thing that is important to keep in mind, though, is that in many countries, when you look at how much share those analogues are capturing, it's usually not so much actually. Usually, they don't capture much because the devices are not the best, and to some extent, physicians are getting a little bit confused by the number of products that are being introduced including analogues. So in most cases, we are able to maintain our market share. We lose price, of course, because the payers are cutting reimbursement prices. But we certainly are able to in most cases maintain our share and our volume, and we saw that this year. So we expect sort of a continued trend in that direction next year in Europe. And so Marc, do you want to cover the guidance question?

Yeah. I think, first of all it's not the guidance. We said we would provide the guidance in February next year. What we have given you is a preview of what it could look like in 2015. And your reference to the single point, I think you need to understand the words as we said a decline of about 10%. When it's about of course it can go slightly under 10%, slightly above 10%. We have also given you a variation for the impact of ForEx and get the expected, which is about 5%. So again, you have some variation around 5%. And if you apply those two variances, you can certainly reach a range, which is the range that we are considering for next year. And then when you have the range then you can say, you can take the lower end of the range and we are going to be no less than the lower end of the range. This is the way it's constructed. But again, it's not the guidance. We'll do that next year in February.

So I'll take the last question from Simon Baker of Exane. Simon, go ahead.

Thanks you so much. Most of them have been answered. I just got one left. I see from slide 16 that it looks like Symbicort in Europe faced about a 7% price decline. So I was wondering if you could give us an update on the European pricing environment, our environment now, and your assumptions for 2015.Thanks.

Yes. Simon. Luke, do you want cover this one, or?

So I think, I mean, this is part of the structure the market there we see national, international reference pricing on regular intervals. So the changes related to Symbicort in the last 18 months were, I mean, France and Germany, for example. And I think the key thing is the point that Pascal made before is that there is some resilience around this device and the market share conversion that we're seeing is low and we'll defend our position.