on what had already been accomplished, we significantly expanded the goals of this initiative in October 2006 and are now targeting an absolute net reduction in the pre-tax expense component of Adjusted income and the creation of a more flexible cost structure. In addition to these cost-centered goals, we have announced other priorities, such as maximizing revenues from the current product portfolio, investing in medium- and long-term growth opportunities through our internal pipeline and externally-sourced products and creating smaller, more focused and accountable operating units. (See

further discussion in the “Our Productivity and Cost Savings Program” section of this Financial Review. For an understanding of Adjusted income, see the “Adjusted Income” section of this Financial Review.)

Our Operating Environment and Response to Key Opportunities and Challenges

We and our industry are facing significant challenges in a profoundly changing business environment and we are taking steps to fundamentally change the way we run our business to meet these challenges, as well as to take advantage of the diverse and attractive opportunities that we see in the marketplace.

There are a number of industry-wide factors that may affect our business and they should be considered along with the information presented in the “Forward-Looking Information and Factors That May Affect Future Results,” section of this Financial Review. Such industry-wide factors include pricing and access, intellectual property rights, product competition, the regulatory environment and pipeline productivity and the changing business environment.

Pricing and Access

We believe that our medicines provide significant value for both healthcare providers and patients, not only from the improved treatment of diseases, but also from a reduction in other healthcare costs such as hospitalization or emergency room costs. Notwithstanding the benefits of our products, the pressures from governments and other payer groups are continuing and increasing. These pressure points can include price controls, price cuts (directly or by rebate actions) and regulatory changes that limit access to certain medicines.

• Governments around the world continue to seek discounts on our products, either by leveraging their significant purchasing power or by mandating prices or implementing price controls. In the U.S., the enactment of the Medicare Prescription Drug Improvement and Modernization Act of 2003 (the Medicare Act), which went into effect in 2006, expanded access to medicines to patients-in-need through prescription drug benefits for Medicare beneficiaries. While expanded access results in increased sales of our products, such increases could be offset by increased pricing pressures in the future, due to the enhanced purchasing power of the private sector providers that negotiate on behalf of Medicare beneficiaries.

• We have recently seen restrictive measures on access and pricing taken by influential decision-makers in several large European markets and the growing power of managed care organizations in the U.S. has increased the pressure on pharmaceutical prices and access.

• A rise in