Good afternoon, ladies and gentlemen, and welcome to AstraZeneca's Q1 Results Analyst Conference Call. Before I hand over the call to Pascal Soriot, I would like to read the safe harbor statement. The company intends to utilize the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995. Participants on this call may make forward-looking statements with respect to the operations and financial performance of AstraZeneca. By their very nature, forward-looking statements involve risk and uncertainty, and results may differ materially from those expressed or implied by these forward-looking statements. The company undertakes no obligation to update forward-looking statements. There will be an opportunity to ask questions after today's presentation. Please press star one to indicate you wish to ask a question at any time during the call. We will now hand you over to AstraZeneca, where the call is about to start.
Hello, everyone. I'm Pascal Soriot. Welcome to the first quarter results conference call and our webcast presentation for the investors and analysts. We're in London today, where we are also hosting the annual general meeting this afternoon. We have people on the phone and on the webcast. The presentation is available online for all of you to download. Please turn to slide two. This is the safe harbor statement. Moving on to slide three. We plan today to spend about 30 minutes on the presentation and then leave 30 minutes for Q&A. In total, we have exactly one hour together, and we need to end on time as another company has a conference call starting in one hour. If you want to ask questions from the phone, you can get in on the line already now by pressing star one.
There is also an option to ask questions online as part of the webcast. As we need to stay on time, please limit questions to one per person. This is to make it fair to everyone on the call. Thank you for your collaboration with that. As usual, I'm joined by Marc Dunoyer, CFO, Mark Mallon, our EVP for Global Portfolio and Product Strategy, Global Medical Affairs and Corporate Affairs, and Sean Bohen, our EVP for Global Medicines Development and our Chief Medical Officer. We also have online Jamie Freedman, who is our Business Unit Head for Oncology. Please turn to slide four. This is the agenda today. I move to slide five. Before we get started on financials, just a reminder that we made refinements in our results announcement this morning, emphasizing actual growth rate alongside growth rate at constant exchange rate.
On our conference call today, we will be making comments on our financial performance at CER, which is a non-GAAP measure. With the formalities behind me, I will now kick off. In summary, we had a good start to 2017. Total revenue declined in the quarter, primarily reflecting the tail of the loss of U.S. exclusivity for Crestor. New AstraZeneca, which we define as the three main therapy areas and the established medicines in the emerging market, grew by 6% in the first quarter. The emerging markets were really a highlight. They were up 9%, and they are now the biggest sales region in AstraZeneca. Within this region, China continued to perform well and saw regulatory approval and launch for TAGRISSO and approval for FARXIGA. Our respiratory business delivered a stable performance despite the ongoing challenges in the U.S., and SYMBICORT remained the global leader by volume market share.
In diabetes, another competitive field, FARXIGA continued to grow in all markets, despite subdued U.S. growth due to affordability programs and managed care access. BRILINTA continued to excel. TAGRISSO has expanded on its impressive launches in the U.S., in Europe, and in Japan, and now we are also accessing the private market in China. The core earnings per share decline was limited to 4%, given the continued cost focus, but also due to the continued sales progression of the New AstraZeneca. Now we'll turn to slide six. Our pipeline delivered very strong results since the last results announcement. This is the most extensive set of highlights for a long time. Let me cover a handful of news items.
First of all, TAGRISSO news included the conversion from accelerated to full approval in the U.S. and the EU, and the important approval in China that followed a very accelerated regulatory review. In the meantime, we've also launched TAGRISSO in China with very good start. LYNPARZA received the regulatory submission acceptance and priority review in the U.S. for the second-line application in ovarian cancer, as well as an orphan designation for the same cancer in Japan. As the first-ever PARP inhibitor, LYNPARZA met the phase III primary endpoint in BRCA-mutated metastatic breast cancer. FARXIGA received approval in China, and the SGLT2 class, including FARXIGA, showed encouraging CV outcomes data in the CVD-REAL world study. Further in diabetes, the new Bydureon auto-injector was accepted for U.S. regulatory review. The disappointing news was that we received a complete response letter for ZS-9 in the U.S.
There are more milestones that Sean will speak to later and a good start to 2017 should bode well for the rest of the year. Please turn to slide 17. When we look at New AstraZeneca, it was another strong quarter where product sales grew by 6%. All CRP areas contributed, and so did the established medicines in the emerging market. As we move forward, these areas will be the key growth drivers as we exit the major patent cliff for Crestor in the U.S. By July this year, comparisons will ease, and we look forward to keeping you updated on our return to growth in product sales. This graph in the light gray shading shows you that we are reaching the end of the impact of this large patent expiry. Please turn to slide eight.
We begin returning to growth, our focus is increasingly on commercial execution, and we've already launched Bevespi and QTERN this year. At the end of the year, we anticipate the launch of benralizumab, our first biologic to treat severe uncontrolled asthma. In bladder cancer, durvalumab's U.S. PDUFA date remains this quarter. We were also encouraged by the positive phase III data for LYNPARZA in metastatic breast cancer. There's a lot more pipeline newsflow expected over the next few quarters with MYSTIC and FLAURA as two important highlights. With the opportunity in first-line lung cancer shared between TAGRISSO and our two IO medicines, we have the chance to become a leader in the treatment of lung cancer, and so far, we remain very confident in the MYSTIC trial refinement. With this, I will now hand over to Mark Mallon.
Thanks, Pascal. I'm pleased to be here with all of you today to talk about our performance of the growth platform. We'll get started by moving to slide number 10. Our growth platforms continued to demonstrate overall growth in the quarter, despite a stable performance in respiratory. The combined revenue of our five growth platforms represented almost two-thirds of our total revenue in Q1, and momentum was clearly seen in emerging markets and in new oncology. I'll touch on the performance of emerging markets in Japan, but I'm going to focus most of my remarks on respiratory, new oncology, and our cardiovascular and metabolic platform, which we'll refer to as New CVMD. This groups together BRILINTA and our growth diabetes product and medicine. Slide 11, please.
We continue to remain on track to deliver our long-term performance goal of product sales in the mid to high single-digit range. Emerging markets, as Pascal mentioned, is now AstraZeneca's largest sales region, with the growth being driven by the growth product BRILINTA, FARXIGA, and respiratory. China continues to be a key driver, where we recently received, as Pascal mentioned, approvals for FARXIGA and TAGRISSO. Turn to slide 12. Taking a look at respiratory franchise, sales stabilized in the quarter after a challenging second half of 2016, with downward pressure in the U.S. being offset by strong emerging market performance. SYMBICORT continued to grow unit volume, up a few percent, and continues to lead the ICS/LABA class globally. Product sales were down by 8%, reflecting pricing headwinds in the U.S. and competitive dynamics in Europe. This was offset by the positive emerging markets and established rest-of-the-world growth.
In the U.S., SYMBICORT product sales declined by 21%, with slight volume growth. We continue to see significant price rebasing, and as previously mentioned, we expect the pricing pressure to be strongest in the first half of the year. In Europe, SYMBICORT product sales were down by 9%, with continued pressure from both branded and analog competition. Emerging markets delivered growth of 10%, with SYMBICORT sales in China up by 24% in the quarter. Pulmicort continues to grow for us, up to 14% in the quarter, with strong emerging markets growth of 28%, mainly driven by China. Bevespi launched successfully in January in the U.S., performing in line with the previous launch products in the class, and early feedback from physicians has been positive. We plan to make a regulatory submission for Bevespi in the E.U. soon. Turn to slide 13.
Just taking a step back for a moment from sales in respiratory, we really believe our overall respiratory strategy is well-positioned to take advantage of the expected market expansion over the next 10 years. Significant unmet need still exists, with asthma and COPD currently affecting 600 million individuals worldwide. The inhaled market is forecast to grow in volume, particularly in the emerging markets, with new treatment approaches driving further expansion. Biologics are forecast to accelerate growth further through increased penetration and earlier use of biologics. Our respiratory portfolio is well positioned for this evolving market. With benralizumab, which has been accepted for regulatory review in the U.S., the E.U., and Japan, tralokinumab, with phase III data read out in the second half of this year, and tezepelumab, which met its primary endpoint in the phase II-B trial PATHWAY.
Our ambitions in respiratory go beyond our current inhaled and biologic portfolio. We will continue to push the boundaries of science in our early pipeline, with the goal of early intervention and ultimately impacting disease modification. Slide 14, please. Turning to New CVMD, which represents our on-patent medicines in CV metabolic diseases, and that support our return to growth strategy. The New CVMD sales were up by 6% despite intense competition, with strong performance in emerging markets offsetting a weaker U.S. performance. We continue to focus on BRILINTA, and in diabetes, FARXIGA and Bydureon. BRILINTA delivered product sales of $244 million in the quarter, with 27% growth. Notable performance was seen in the U.S., in China, and emerging markets. We remain confident that BRILINTA will become a $1 billion blockbuster product this year. BRILINTA emerging market sales grew by 54% to $60 million, with China sales increasing by 68%.
U.S. sales increased by 24%, reflecting updated guideline. In Europe, sales were up 12%. BRILINTA continued to outperform the OAC market in this region. In diabetes, we continue to focus on the two medicines that have the potential to offer a CV benefit, FARXIGA and Bydureon. Our diabetes franchise exhibited a soft quarter with minus 1% sales growth. Product sales in the U.S. declined by 7%, result of intense pricing pressure and competition for market share. Europe exhibited growth of 1% with FARXIGA offsetting losses in Onglyza. FARXIGA maintained a 40% share globally with product sales of $207 million in the quarter and 25% growth. We expect growth will be supported by the broader knowledge in the medical community of the CVD-REAL data, confirming the morbidity and mortality benefits of this class of medicine.
In the U.S., FARXIGA outgrew the SGLT2 class, and product sales were up 2%, due to affordability programs and managed care access. FARXIGA delivered strong growth in Europe and emerging markets, with sales up 24% and 90% respectively. In Bydureon, we returned to growth in the first quarter, with 14% growth driven by the U.S. and established rest of the world, with sales of $153 million in the quarter. We are also very excited to announce that the FDA has accepted the auto-injector for regulatory review in the U.S. Please turn to slide 15. In Japan, we returned to growth. Product sales were up 3% in the first quarter, driven by TAGRISSO, FARXIGA and Nexium. This included a 6% decline in pricing as a result of national price cut in April 2016. TAGRISSO sales continue to grow, and the Japanese yen sequential quarterly growth was 7%.
T790M testing levels are now at 85%, of which about a quarter is from the new blood-based test for the T790M mutation. In March, in Japan, LYNPARZA was awarded the orphan drug designation for ovarian cancer, which ensures a shorter regulatory review period. We anticipate our second new oncology launch in Japan in 2018. Slide 16, please. Turning to new oncology. 2017 continues to be an exciting year for us. New oncology product sales of TAGRISSO, LYNPARZA and the U.S. Iressa were $236 million in the quarter. TAGRISSO continues to demonstrate strong uptick in the U.S., Europe and Japan, with global product sales of $171 million and 48 regulatory approvals. In China, we have launched TAGRISSO in April, a few months ahead of industry benchmark, just after a few weeks between the approval and the first sale.
Really remarkable performance by our teams across the globe and in China to make this happen. This included obtaining the import license. LYNPARZA Q1 product sales were $57 million, up 32%. We continue to see growth driven by higher testing rates and market penetration. We also saw an increase in competitive pressure in the U.S. We will look to expand the current use based on strong SOLO2 trial data in second-line maintenance treatment of ovarian cancer, and we look forward to further label expansion trials outside of ovarian cancer, like breast cancer, where we have new data now. To conclude, overall, we saw solid performance from our growth platform. We're looking forward to the next wave of launches, and together they will drive the emergence of the New AstraZeneca. Thank you for listening, and I'm happy now to turn this over to Marc.
Thank you, Marc, and hello everyone. I'm going to spend the next few minutes taking you through our financial performance in the first quarter. Please turn to slide 18. As usual, I will begin by showing the reported P&L numbers before turning to the core numbers. Total revenue declined by 10% in the quarter, impacted by the entry of the U.S. multiple generic for Crestor in July last year. External revenue increased by 3%. As previously highlighted, we expect the sustainable and ongoing path of external revenue to increase over time. In the first quarter, this increased to 32% of total revenue from 21% in the whole of 2016. Please turn to slide 19.
If we now turn to the core performance, we can look further down the P&L and see that our gross margin in the quarter was down at constant exchange rate by one percentage point to 83.6%, reflecting a changing mix of sales, including the impact of patent expiries, partly offset by the resilience of some legacy medicine in established markets and the growing influence of specialty care medicine. The absolute gross margin benefited from foreign exchange. It is important to note that we do not anticipate such a high gross margin to continue over the full year. However, I would like to make an additional remark. There was no real change in gross margin from emerging markets now being our largest sales region. Core R&D costs declined by 3% in the quarter. Core SG&A costs declined by 12%.
These declines reflect our focus on cost control and support a full year commitment of keeping core R&D costs broadly stable, as well as reducing core SG&A costs. Again, we do not anticipate such a similar reduction in core SG&A costs over the full year. Core other operating income increased to $333 million, including a gain on disposal of short-term investment, as well as a milestone received from Pfizer. The core tax rate in the quarter was 17%, which was within the 16%-20% range we have indicated for the full year. As Pascal mentioned a moment ago, the core EPS decline of 4% was limited by the favorable sales progression of New AstraZeneca and our relentless focus on cost. We turn to slide 20. This slide, which is now familiar to you, illustrates the important progress we have made towards taking costs out of the business.
As just mentioned, core R&D decreased by 3%, whereas core SG&A costs decreased by 12%. The SG&A decline, equivalent to one percentage point of total revenue, was partly driven by the simplification and aligned standards for the centralization of shared services, including back and middle office activities. We recently launched a global business service organization, which over time will increase the level of integration and allow us to focus on costs further. We remain committed to continue reducing our cost base this year. Please turn to slide 21. To conclude, I want to reiterate the 2017 guidance, which is at constant exchange rate. I expect a low- to mid-single-digit percentage decline in total revenue. Core EPS is anticipated to decline by low- to mid-single percentage. Outside of guidance, the total exchange revenue and other operating income is still expected to be ahead of that in 2016.
Sustainable and ongoing income is expected to increase as a proportion of external revenue in 2017 and beyond. We anticipate that core R&D costs will be broadly in line with 2016, and as I just mentioned now, we plan to make further reduction in core SG&A costs. As I highlighted before, variation in performance between quarters can be expected to continue, with year-on-year comparison beginning to ease in the second half as we begin to lap the impact from the loss of Crestor in the United States. Our capital allocation priorities remain unchanged. We will continue to strike a balance between the interests of the business, our financial creditors, and our shareholders. After providing for investment in the business, supporting a progressive dividend policy, and maintaining our strong investment-grade credit ratings, we will keep under review any potential investment in value-enhancing and immediately earnings accretive opportunities.
With that, I will hand over to Bohen.
Thank you, Marc. I would now like to run through the late-stage pipeline events since the last result announcement, the highlights of recent data presentation, and then wrap up with a look at our upcoming news flow. Please turn to slide 23. As you can see here, it was quite a busy quarter, with progress in all therapy areas, and as you will see through my presentation, we anticipate this pace to continue through the year. To highlight approvals achieved, we had conversion to full approval for TAGRISSO in the United States and the EU, approvals for TAGRISSO and FARXIGA in China. QTERN was approved in the United States for type 2 diabetes, and the approval for Siliq for psoriasis by our partner. For regulatory submissions accepted, LYNPARZA was accepted in the United States for second-line ovarian cancer, supported by data from the SOLO2 trial and Study 19 trial.
This submission was granted priority review. The Bydureon auto-injector in the U.S. was accepted. This anticipated approval will make the medicine more convenient for patients to administer. SYMBICORT, specifically for exacerbations in COPD, and benralizumab in China for severe uncontrolled asthma. We received a second complete response letter for ZS-9 related to manufacturing issues. We remain committed to bringing this important medicine to patients with hyperkalemia and are currently working with global regulatory agencies to accomplish this goal. To complete the picture, we had the positive phase III trial for LYNPARZA OlympiAD. This compared LYNPARZA to chemotherapy in metastatic breast cancer. As many of you know, we will have these data to present at ASCO in June. Please turn to the next slide. At recent oncology medical meetings, we have kept up the positive momentum with data presentation. We have presented updated bladder cancer data from Study 1108.
As a reminder, we are under regulatory review in the U.S. following our mid-December announcement of submission acceptance with the PDUFA date in this quarter. We had additional concordance data on PD-L1 diagnostic assays with an effort to reconcile the various existing tests for PD-L1. We had LYNPARZA's SOLO2 data at the Society of Gynecologic Oncology meeting presented in March. Early data at the AACR meeting on a number of our medicines and innovative biomarkers, including more advanced data on our TLR7,8 agonist in solid tumors and LYNPARZA combined with temozolomide in second-line non-small cell lung cancer. You can turn now to slide 25. With this slide, I'll conclude on oncology. This slide will be familiar to you, demonstrating our commitment and expected upcoming immuno-oncology data readout from phase III trials ongoing. First, a few updates.
We had last patient begin dosing in KESTREL since the last update on the pipeline, as well as in DANUBE for the global trial, which excludes China. We had first patient dosed in PEARL, which is a first-line IO trial, specifically in Asian patients. We also had a first patient dosed in CASPIAN. CASPIAN is not listed on this slide. It is a phase III trial in small cell lung cancer. For data in mid-2017, as you all know, we'll have the first data from MYSTIC. This will be the final PFS analysis. We're confident in the recent trial refinements that we discussed last quarter and shared with you. You will also note that some of these refinements have found their way into other programs in other indications, namely the NEPTUNE and KESTREL trial.
In the second half of 2017, we'll have the first data for ARCTIC in third-line PD-L1 low negative non-small cell lung cancer patients. This has pushed out from our expectation in the first half of 2017 because of a slower accrual of events, as we described in the results announcement that we circulated this morning. Further in lung, we expect data from PACIFIC in stage 3 unresectable non-small cell lung cancer. We will also see KESTREL data in first-line head and neck cancer. Next year, again, will be a busy year with final overall survival data from both MYSTIC and NEPTUNE in non-small cell lung cancer. Of course, there are interims for overall survival before that in these trials. Further, we expect readouts from DANUBE in bladder and EAGLE in head and neck cancer. We have also added our new POSEIDON trial to the overview now.
It's our durva/tremi combo with chemotherapy. Also durva with chemotherapy and compared to standard of care chemotherapy. This is based on the encouraging phase I data we shared with you late last year at the World Conference on Lung Cancer meeting. We look forward to keeping you updated on our progress of our upcoming announcements in our IO portfolio. To slide 27, please. Moving on to data from our CVMD portfolio. At the ACC meeting in March, we shared the results of an exciting real-world evidence study called CVD-REAL. This is the first large real-world evidence study of its kind evaluating the rate of hospitalization for heart failure and of death from any cause in patients with type 2 diabetes on SGLT2 inhibitors compared to other medicines for the treatment of diabetes.
The study included more than 300,000 patients with type 2 diabetes from around the world, and approximately 87 of these patients did not have existing cardiovascular disease. The CVD-REAL results are a robust, consistent, and confirmatory dataset showing that the treatment with the SGLT2 class cuts the rate of hospitalization for heart failure and death from any cause by approximately 50%. This is the first of several comparative analyses of CVD-REAL. The study is ongoing and there will be future analysis conducted and presented using this dataset. On the right-hand panel of the slide, other outcomes trials are underway, including EXSCEL with Bydureon, with data expected in the second half of this year, which is earlier than previously expected. The change in expectation for data readout is due to a faster than expected event rate. We also have DECLARE with FARXIGA with data in 2019 at the latest.
We have two additional FARXIGA outcomes trials started this year, one of those in heart failure and one in chronic kidney disease, both in patients both with and without diabetes. I can also share with you today that we recruited the last patient into the STRENGTH study for Epanova. This is an outcome trial in combination with statin conducted in 22 countries worldwide with data expected in 2019. In summary, our goal in CVMD is to reduce morbidity, mortality, and organ damage by addressing multiple risk factors of cardiovascular and metabolic diseases for the long-term benefit of patients. If we now go on to slide 28, this is our news flow that is expected in 2017 and 2018. You can see from this slide, these are both very busy and very exciting years for AstraZeneca.
By the end of 2017, we expect to have received six additional regulatory decisions and will have had first data readouts for MYSTIC, PACIFIC, ARCTIC, and KESTREL, as well as for SOLO-1, first-line ovarian cancer with LYNPARZA and FLAURA in frontline EGFR mutant non-small cell lung cancer with TAGRISSO. We will see the potential for a fast market opportunity with a Calquence readout and anticipate submitting this year as well. Outside of oncology, we'll see data from the Bydureon outcomes trial, EXSCEL as mentioned, and the first phase III data for tralokinumab in severe uncontrolled asthma. In 2018, we will have additional regulatory decisions based on ongoing reviews and an additional round of first data readouts, including for NEPTUNE, DANUBE, and EAGLE. We'll also see data on roxadustat for anemia, benralizumab and PT010 in COPD, and anifrolumab in lupus.
With this much going on, you will likely appreciate that we are busy moving the pipeline forward to bring benefit to patients worldwide, as well, to benefit our shareholders. With that, I will hand back to Pascal for closing comments.
Thank you, Sean. Please turn to slide 30. Before we end, let me quickly summarize. First of all, we had a good start to 2017. In particular, the emerging markets now became our largest sales region. New AstraZeneca group product sales by 6%, and our financials are on track, and we reconfirmed our guidance. More importantly, the pipeline is advancing at pace with 12 new potential medicines in phase III or under registration. The oncology pipeline, in particular, is progressing ahead of our expectations with TAGRISSO, LYNPARZA, and the immuno-oncology program progressing quite nicely. We're looking forward to sharing further news flow that we think has the potential to mark a meaningful step change for AstraZeneca, in particular, the first-line data for TAGRISSO and, of course, the MYSTIC trial data in lung cancer. We'll now go to Q&A.
For people on the conference call, please remember to press star one to ask a question. We'll also take written questions from the webcast. Can I please remind everybody to limit questions to one to be fair to all of our callers? I'd like to thank you in advance, and we'll take the first question from Sachin Jain at Bank of America. Sachin, over to you.
Hi, Sachin Jain, Bank of America. One question for Sean on POSEIDON. I wonder if you could just briefly review your perspective of the data you presented at World Lung and whether you have any additional data in-house, in particular, focusing on your perspective on the safety of the triple, given that physician feedback seems to be some concern around CTLA-4 tox in isolation. Then if you could just touch on what chemo sequencing you're looking at in POSEIDON, given the study at World Lung, I think, investigated concurrent chemotherapy. Thank you.
Thank you for the question, Sachin. We do have a little more data than what's presented at World Lung, and that's just because you have a cutoff time for when you submit an abstract and actually do the presentation and prepare it, and then we have more follow-up. I will say it's phase I data, so it is limited, but what we felt we saw and what we presented and what has borne out so far is that we get the toxicity of the combo and the toxicity of the chemo, but we don't really see an enhancement of the two when combined, so that we're able to tolerate giving them together. We are giving them together concurrently. I guess that was the other question about what does POSEIDON do.
It's very similar to what you saw at World Lung in terms of how they are given, because as we said, we felt that that was a manageable toxicity profile.
Thank you, Sean. Tim Anderson at Bernstein. Tim, go ahead.
Thank you. A question on ARCTIC and the delay. You say that events are occurring more slowly, but this is a 3rd-line lung cancer trial, which is a fast progressive disease, and chemo doesn't work very well on 3rd-line, I thought that events would actually come in quite fast, and I'm wondering if you can say whether you've changed any aspect of the statistical design of ARCTIC here in recent months such that it would delay the readout. Then a second question on the ELCC abstracts from yesterday for the upcoming European Lung Meeting. There's an abstract from the Lung-MAP study that shows quite weak response rate with durva monotherapy even in PD-L1 positive patients, which is kind of surprising, and I'm wondering if you can give us your thoughts here.
The first question is did we— I'm going to try to simplify it. The question is, did we change the analysis plan or the level of maturity we asked for out of ARCTIC in order to do the analysis? The answer to that is no. We have made no changes to the analysis plan. The maturity required was pre-specified in order to demonstrate the treatment effect we were anticipating and looking at the number of patients that we had on the trial, reminding you that ARCTIC is a bit complicated. It has a three to two to two to one randomization for its different arms. We had forecast that we would be getting new data sooner. Obviously the event rate is lower than we anticipated as well, but that's the reality of it. It's not something that we changed or manipulated.
It's pre-specified, it's taking that long for the events to accumulate. That could be because our treatment effect is good, or to be honest, it could be that we got more favorable prognosis patients than we had anticipated, they're just doing better independent of treatment. With regard to the question in ELCC, these small data sets, it's absolutely true that the point estimate bounces around. When we look at our data in aggregate, we remain confident. 1108 is probably the thing we've presented most on and shared most with regard to PD-L1 positive and durvalumab, we feel that durvalumab is quite consistent with the class. That we have confidence in our program.
Thanks, Sean. Matthew Weston at Credit Suisse. Go ahead, Matt.
Thank you very much. It's a follow-up question on ARCTIC. Sean, you've previously said that you require the tremelimumab arm within ARCTIC to basically just justify or satisfy the FDA requirements on contribution of components for MYSTIC. Now I'd like to understand the filing strategy, assuming we get a positive outcome for MYSTIC in the middle of the year, whether you will have to delay filing until you get that tremelimumab arm out of ARCTIC, or whether or not you would anticipate filing MYSTIC with that data pending, then add it to the file once ARCTIC matures.
We don't anticipate any delay to the filing of MYSTIC. If MYSTIC turns out to be positive and enables the filing of the mono. In this case, the question is, of course, of the combo. We remain very confident in our contribution of component strategy and that we will have the data to enable that should the outcome of the trial support it.
Thanks, Sean. James Gordon. James, JPMorgan. James, go ahead.
Hello, thanks for taking the question. As I understand it's got the two immuno-oncology ingredients and the chemo, and there'll be an arm that's chemo plus PD-L1. Is there a possibility of getting a chemo PD-L1 label on the basis of the study if the triple therapy approach wasn't successful? In that case, is this in a way an insurance policy around MYSTIC as well?
Let me deal with the insurance policy one first, then I'll go back and talk about what a positive result would look like in that trial. It really isn't an insurance policy. We have not lost our confidence in MYSTIC. What we have, and I've mentioned this before, what we have seen and gotten feedback from treating physicians is that there is a perception that immuno-oncology treatments are slower onset than chemotherapy, there are a subgroup of patients that progress very quickly. They do not feel, with that subgroup of patients, that they can deny them chemotherapy.
What we're doing is we're giving them a complete data set to enable them to decide what does chemo IO look like versus the chemo that is given a standard of care still in many places in the world, and also obviously in the first line in PD-L1 low expressers. The trial is designed to compare chemo IO or chemo IO plus IO versus standard of care chemotherapy. If you beat standard of care chemotherapy, you have a positive trial. It will then be a judgment call on benefit risk if both arms were to be positive, whether you felt like the chemo chemo or that IO chemo was superior to IO only with chemotherapy, and that would be a judgment that we would make and also that regulators would want to look at.
Thanks, Sean. Jack Scannell, UBS. Jack?
Hi. Thank you very much for taking my question. Just one on the diabetes franchise. We've been doing some work on formulary status. It looks like Onglyza's probably been losing a bit of formulary coverage over the last two or three years. Trajenta gaining and Januvia slightly down. In the SGLT2s, FARXIGA holding, with Jardiance going up and Invokana probably losing a bit. I'm just trying to reconcile that with some of the light diabetes sales we saw in Q1. Does this reflect any particular change in the sort of contracting dynamics that we're seeing, or has something else gone on?
Okay. That's a question for you, Marc. Mark Mallon ?
I think these are both, certainly the DPP-4s and also the SGLT2s are very competitive markets. The contracting challenges and pricing pressures have been strong and continue to have some amount of that going forward. That's had an impact on the sales growth for all of the companies in the product. We believe that this is the class that is going to be a key factor of really the foundation of diabetes therapy in the future. We're really focusing on continuing to grow growth of the class and of course, FARXIGA. Maintaining good access is a key part of that priority, and we're going to continue to support the strong access that we have for FARXIGA.
Thanks, Marc. Remember that we are in the early days of this class. It's still quite small relative to DPP-4s and other classes of oral anti-diabetic agents. The key is really to drive the cardiovascular benefits. Today, we can't really promote that, of course, but over time, this is what's going to drive the class. Simon Baker at Exane. Simon, go ahead.
Thanks for taking the question. Just moving on to respiratory, I noticed that the filing timeline for PT010 ICS triple appears to have shifted from 2018 to 2019. I wonder if you could give us some color on the reasons for that delay. Thank you.
What it really has to do with, in the United States, primarily the rate of enrollment and how long we will have follow-up in order to enable filing in COPD. It just is an adjustment based on actual data as we enroll the trial versus what we had forecast.
Thanks, Sean. There is a n online question here. Maybe I should take one of those webcast questions, sorry, from Mattias Häggblom at Swedbank. The question is, given the fact that MYSTIC, as most other IO trials, have an open label trial design, investors may have concerns that some of the recent amendments to the trial design of MYSTIC include amendment of core primary endpoint, but also the fact that a decision to start an IO triplet study. I am sorry, that includes chemo. I am sorry, they are adding a comment. That includes chemo as announced today. Sorry. The question is becoming longer.
I know you do. You want me to just go ahead and-
Yeah, why do not you try? Yeah.
All right. Yes, MYSTIC is an open label trial design. Now, for a second, I want to explain, when you compare IO to chemo, you will be unblinded. The investigator will be unblinded. The reason is that if you look at, for instance, the blood counts in the patient, you will know that if you get myelosuppression, the patient is receiving chemo versus IO. It is not really possible to blind. How do we solve that? The way we solve that for the PFS primary endpoint is that we have the response and progression called by an independent radiographic review center, a blinded independent radiographic review center. They do not know the treatment assignments of the patient. They just get the scans and read them over time. That is for PFS, how you create the blind.
For overall survival, this is not an endpoint that's really sensitive to knowing the treatment assignment or not knowing the treatment assignment. There, it's less important, and that's how the study's design incorporates that. By the way, has nothing to do with the recent amendment. That was the design of the trial from the very beginning. A decision to start an IO triplet that includes chemotherapy. I think I addressed this already. That's more a pragmatic decision. We believe that there will be a place for chemotherapy in some patients with non-small cell lung cancer, regardless of where IO comes in, because physicians do see these rapid progressors. They do see that the standard of care doublet chemo was approved and used based on a survival benefit.
Some patients will probably get chemotherapy, and we just want to really establish for physicians what is the benefit of using the two together and what is the safety profile.
Thank you, Sean. Just like to remind everybody actually that this IO chemo strategy, we mentioned a long time ago that we would explore that combination for the reasons that Sean just highlighted. We also said that we wanted to explore IO 2 chemo, and as a result, did this phase I study that, of course, we had to wait for. It's not a new event. It's not a knee-jerk reaction to any new development. It was part of our strategy from sort of day one, really. There's Vincent Meunier at Morgan Stanley. Do you want to go ahead, Vincent?
Thank you very much for taking my question. A question on Lynparza. What should we expect in terms of sales dynamics for Lynparza, notably in the context of the 4% decline in the U.S. in Q1? Should we expect sales to grow before the SOLO2 label update? Also, would you anticipate off-label use in breast based on OlympiAD?
Thanks, Vincent. Jamie, do you want to cover this question?
Yeah, sure. Thanks for the question. We have seen some competitive pressure in the marketplace in the U.S., and that's due to early entry of competitors. We're optimistic because we've had positive news. For the SOLO2 results in 2nd-line maintenance was presented at SGO. They were positive, and we filed in the U.S., and it's undergoing priority review. We hope with SOLO2, we'll be introducing a tablet formulation, which is important, in the third quarter. In Japan, we've received orphan drug designation, and that will accelerate the approval timeline. Then, as was mentioned previously, with the positive OlympiAD results that we reported that will be actually presented at ASCO in metastatic breast cancer, we will be the first PARP inhibitor in that new indication. Overall, we do expect an uptick in sales, particularly in the third quarter.
At the end of the year is the SOLO1 readout in 1st-line maintenance, which should also help as well.
Vincent, this is Sean. I just want to add for you that, as Jamie mentioned, with the presentation of the OlympiAD data at ASCO, that does also give us the opportunity to seek guideline recommendation for LYNPARZA in metastatic breast cancer. At least in the United States, if that is granted, that does sometimes drive some use ahead of regulatory approval.
Thanks, Sean. His real first name is Vincent, by the way, but for today, we'll call him Vincent. Seamus Fernandez at Leerink. Seamus, do you want to go ahead and ask your question? Seamus?
Yeah. Hello, can you hear me?
Yep.
Okay, great. Thanks. I just have two questions. The first one really is on the quality of the earnings and statements that your view is that this was a good quarter. We're seeing more externalization build into the P&L, and I'm increasingly challenged to think about the quality of the earnings after, let's say, in the next couple of years. Can you talk a little bit about where we should be seeing SG&A going? In preliminary comments, I think you said that-
12% down on SG&A this quarter is not sustainable for this year, and I'm just trying to understand why that's the case as the arms race globally continues to come down. The second question is the enthusiasm around the emerging markets. Can you help us better understand why you're so enthusiastic about the growth in the emerging markets when China was such a slow grower in the mix? Thanks.
First question, I will ask Marc to cover it, but let me just say, as far as externalization, as we mentioned before, we have an overall target and a guidance for the year. This is going to bounce around a little bit from quarter to quarter. It is not because you have a large quarter that you should think, okay, this is becoming very large. It is going to vary from quarter to quarter because, of course, the timing of these deals varies a little bit. As far as the specific SG&A question, Marc, do you want to cover this?
Yes. Just relatively briefly, the minus 12% in reduction of SG&A in the first quarter, you need to remember, we initiated a program of productivity increase starting second quarter of 2016. We have, as a comparative base, the first quarter of 2016, and therefore, the 12% is more impressive than the rate that we will have for the end of the year. I do not want to give you a precise number, I can only repeat today that we will have a further reduction on our SG&A cost base for the full year.
Thanks, Marc. In terms of midterm outlook, we have always said we do not typically guide. On top of it, in this instance, it would be really difficult to guide before we have a better view of what kind of clinical news flow we will get. We have such a number of new clinical trials that we read out, and that will define the type of portfolio of products we have, and as a result, it will shape, to some extent, the SG&A ratio moving forward. We really could not give any sort of guidance, even if we wanted to at this stage, in terms of midterm. Beyond 2017, we have 2017 guidance, of course, beyond that would be hard. Emerging markets, Marc and Mallon this time. Do you want to cover it?
Yes. First of all, actually, our growth in the first quarter in China has been solid. Now, in the actual, it was a low single-digit number, it is in constant exchange rate. Actually, we had high single-digit growth. Keep in mind, we do have some impact of the deals that we have done in China. For example, we had a couple of different partnerships in anesthesia, cardiovascular. Actually our China business continues to achieve double-digit growth. That is specifically China, very confident we continue to outgrow the market. We are the number 2 company there. Our position in China remains very strong. Overall, we are positive about emerging markets because the unmet needs are so substantial across the region. I think, of course, there are going to be ups and downs in the emerging market economy because there is volatility.
Long term and overall, we definitely are very confident in that.
If I can follow up, just a quick question. Can you just give us a sense of when perhaps we might start to see leverage in the P&L of those markets then? I think that's another key question.
There was also a question online about the difference in margin between emerging markets and the group as a whole. Our emerging market business is definitely profitable. It's not as profitable as the whole group, as U.S. or Europe. What we've said in the past is that it's a bit less profitable than Europe, but this is not just growth. It is a profitable business for us, and it is very sustainable.
All right. Thanks very much, Marc. Moving on to the next question, Andrew Baum at Citi. Andrew, do you want to go ahead?
Hi. Couple of questions, please on strategies for prosecuting your PD-L1. You referred to the rationale for looking at chemo combinations as one to address a subgroup of patients who urgently need treatment or are symptomatic and require shrinkage. Should I interpret this as indicating that you view the role of chemo as an additive one rather than necessarily showing benefit through immunopotentiation? That's the first question. The second question is, I'd be interested in Sean and the team's view on the reported phenomenon of hyperprogression with some of the PD-1 and PD-L1 assets, and indeed, especially in your head and neck trials, given some of the recent literature, whether you think you are may seeing hyperprogression in some of the patients in the durvalumab arm of that trial. Thank you.
With regard to the immunopotentiation question, that's a theoretical possibility, we really take a pragmatic view as I described, that this is chemo and the benefit you get from that, plus IO when you get time to get that started. With regard to the progression, we haven't seen evidence of it. We would say in aggregate, we don't really see a convincing story for heightened progression. With regard to the trials you're referring to, they're blinded now. We don't know anything about the data, and I can't really answer the question in the context of a blinded trial.
I guess that at least your lung trials, they're open label, and if you're having a patient who's rapidly falling off a cliff, you may get some medical liaisons being approached in relation to the particular patient. That's what I was referring to.
Some lung cancer patients do very badly and progress very quickly. That happens on all their therapies. We've seen nothing that is a pattern specific to IO.
Thank you.
Okay, thanks, Sean. We'll come back again later on if we have time, I'm just trying to keep one question per person. Emmanuel Papadakis, sorry, at Barclays. Emmanuel, do you want to go ahead?
Sure. That was a very good pronunciation. There's one quick question for Marc on cash flow. You had a relatively large negative working capital movement in the first quarter. I was wondering if you could give us a little bit more color on that, and also maybe a bit of color on expectations for operating and free cash flow for the full year in terms of comparability to last year. Should we expect it in line or perhaps slightly ahead? Thank you.
Thank you for the question. First of all, I will address the variation quarter 2017 versus quarter 2016. The variation, as you point out, is mostly on the need of working capital. There are several factors, but one of them is the increase of inventories that we need to have to prepare for the new launches. There is a reduction of managed market rebates payable in the U.S. as we have had sales reductions on a product like Crestor, for instance, which was carrying very high rebates last year. Also, an overall reduction of payables because we have reduced our overall cost base, therefore, the payables on the FGNA has reduced. There is also another factor, that's the factoring that we did. We had increased our factoring in the quarter 2016, which did not happen in 2017.
These four elements are explaining the large variation in the need of working capital. Regarding the outlook for the year, obviously, we're going to continue our effort on cash generation. We are putting pressures on receivable as well as on payable. A bit more difficult to do on inventories, which we won't be able to contain so much because we are launching new products and in particular biologics, which require larger inventories.
Thanks, Marc. Let's take a webcast question from Marietta Miemis at Prime Avenue. The question's for you, Mark Mallon. Can you give us an update of the patient flows between categories in diabetes? Are physicians becoming more comfortable with the SGLT2 class? Is the class mainly gaining from DPP-4 due to additional benefits? Any indicators that SGLT2s are delaying the start of injectable CRP?
Any color on how patient flow into and between the categories is changing as the SGLT2 class gains traction? Any indication would be great.
Physicians are definitely getting more comfortable with the class. I think the best way to describe how that's evolving is earlier use of SGLT2s. We're seeing more use in naive patients. We're seeing more use immediately after metformin, ahead of DPP-4s, and we're seeing physicians adding it on to the other therapies sooner and more early in the process. So far, I can't say that we've got a strong indication of a big change in when injectable therapy is starting. I think both that all of this is going to head towards SGLT2s as people better appreciate the cardiovascular benefits of the class. We're certainly doing our part to educate around the overall benefits in glucose control and weight loss of SGLT2s.
Good. Thanks very much, Marc. We'll have to stop here. We are just getting to almost 1:00. Thank you very much again for your great interest in AstraZeneca, and I wish you all a great day. Thank you. Bye-bye.