Annual Financial Report
ANNUAL FINANCIAL REPORT
AstraZeneca PLC (the Company) announced today the publication of its Annual Report and Form 20-F Information 2011 (Annual Report); Notice of Annual General Meeting 2012 and Shareholders' Circular, together with a covering letter from the Chairman, and 'AstraZeneca 2011 In Brief'.
Copies of the documents have been submitted to the National Storage Mechanism and will shortly be available for inspection at www.Hemscott.com/nsm.do. The documents will be despatched to shareholders shortly. The documents are also available on the Company's website at astrazeneca.com/annualreport2011, astrazeneca.com/noticeofmeeting2012 and astrazeneca.com/shareholderletter2011.
The meeting place for the Annual General Meeting (AGM) will be the Grange Tower Bridge Hotel, 45 Prescot Street, London E1 8GP and the AGM will commence at 2.30 pm (BST) on 26 April 2012.
EXPLANATORY NOTE AND WARNING
Solely for the purposes of complying with DTR 6.3.5R and the requirements it imposes on issuers as to how to make public annual financial reports, we set out below:
- in Appendix A, a management report;
- in Appendix B, the principal risks and uncertainties facing the Company;
- in Appendix C, the Directors' responsibility statement made in respect of the Financial Statements and Directors' Report contained in the Annual Report; and
- in Appendix D, a statement regarding related party transactions.
The appendices have been extracted from the Annual Report in unedited full text. This information should be read in conjunction with the Company's fourth quarter and full year results 2011 announcement, issued on 2 February 2012, which contained a condensed set of financial statements and which can be found at astrazeneca.com/investors/financial-results. Together, these constitute the material required by DTR 6.3.5R to be communicated to the media in unedited full text through a Regulatory Information Service.
Page numbers and section cross-references in the appendices refer to pages and sections in the Annual Report. Defined terms used in the appendices refer to terms as defined in the Annual Report.
This material is not a substitute for reading the full Annual Report.
A C N Kemp
Company Secretary
26 March 2012
APPENDIX A
Chairman's statement
I would like to take this opportunity to review AstraZeneca's financial performance in 2011 and the decisions we took to ensure we continue to deliver sustainable value for you.
Financial performance
Group sales in 2011 were down 2% at CER to $33,591 million (2010: $33,269 million) and reported operating profit was up 10% at $12,795 million (2010: $11,494 million), which included the gain on the sale of Astra Tech. Performance for the year reflected strong double digit sales growth for Crestor, Seroquel XR and Symbicort. It was also impacted by government pricing interventions and generic competition, which combined to reduce revenue by some $3 billion. Revenue in the US was down 2%, as was revenue in markets outside the US: revenue was down 11% in Western Europe, up 4% in Established ROW and up 10% in Emerging Markets.
Reported earnings per share for the full year were up 29% at $7.33 (2010: $5.60), which also included the non-taxable gain of $1.08 from the Astra Tech sale. Our effective tax rate also benefited from an adjustment in respect of prior periods following the announcement in March 2011 that HM Revenue & Customs in the UK and the US Internal Revenue Service had agreed the terms of an Advance Pricing Agreement regarding transfer pricing arrangements for AstraZeneca's US business.
A challenging marketplace
The world pharmaceutical market grew by 4.5% in 2011 and the fundamentals of the industry remain strong. First, the world population continues to increase and age: it passed the seven billion mark in 2011, while the number of people over 65 in 2030 is estimated to be almost one billion, double the 2005 figure. Secondly, we are seeing the emergence of expanding numbers of patients in new markets who can access our medicines for the first time. Thirdly, there remains considerable unmet medical need. Chronic diseases are on the increase, not only in wealthy countries but also in middle income and, increasingly, lower income countries. For example, some 346 million people around the world have diabetes while 24 million are affected by Alzheimer's Disease. Finally, advances in science and technology promise the continued delivery of new medicines that can make a real difference to patient health.
Yet, while the fundamentals remain strong, the challenges facing the industry have been unprecedented in recent years. Patents on some of the world's most successful innovative medicines are starting to expire and we face increasing competition from generic alternatives. Additionally, the need to improve R&D productivity and the number of product launches remains a critical challenge for the whole sector.
Around the world, rising healthcare costs, coupled with the difficult economic climate and continued austerity measures being implemented by governments, have resulted in pressure on prices. This includes pricing interventions in many countries. The regulatory landscape is changing, becoming more global and more complex. It is no longer enough for new medicines to be safe and effective. Health authorities increasingly require additional information regarding a medicine's comparative clinical and cost effectiveness.
Our strategic response
It was with these challenges in mind that your Board undertook its strategy review process in 2011. We are confident that long-term growth in demand for innovative biopharmaceuticals will remain strong. We believe there continue to be opportunities to create value for those who invest in pharmaceutical innovation, and that AstraZeneca has the skills and capabilities to take advantage of these opportunities and turn them into long-term value through the research, development and marketing of our medicines. We also recognise that the industry is going through a period of fundamental change as it seeks to overcome the serious challenges we face.
For us, that means a continued focus on ensuring we drive:
· world class productivity in R&D
· increased external collaboration
· a global orientation, reflecting the growth in Emerging Markets
· stronger customer orientation, particularly towards payers
· operational efficiency with a flexible cost base.
Our 2011 review highlighted the ongoing need for a substantial improvement in R&D productivity if we are to sustain acceptable returns to shareholders. We are therefore planning to accelerate our R&D strategy. We intend to take a new approach to Neuroscience, closing our existing research centres and creating a new virtual innovative medicines unit for our R&D in this challenging field. We also plan to reshape our other R&D global functions to better support a more focused portfolio and create a simpler organisation with greater flexibility in all functional areas.
In his Chief Executive Officer's Review on the following pages, David Brennan outlines the steps we took in 2011 to secure our future business success. David also emphasises that how we do business is as important as what we do. We need to continue to work with integrity and to high ethical standards if we are to deliver on our promise of bringing benefits to patients, creating sustainable value for shareholders and contributing to economic and social welfare. In this regard, the Board has an important role to play in setting high standards and monitoring performance.
Outlook
We continue to plan on the basis that revenue will be in the range of $28-34 billion a year over the 2010-14 period, as revenue growth from key franchises that retain exclusivity and continued growth in Emerging Markets are pressured by the loss of market exclusivity on a number of products. However, based on the evolution of the base case assumptions since 2010, such as the downward pressure on revenue from government interventions, revenue for the remainder of the period is likely to be in the lower half of the range.
Returns to shareholders
In recognition of the Group's strong balance sheet and sustainable significant cash flow, and the Board's confidence in the strategic direction and long-term prospects for the business, we announced, in conjunction with the full year 2009 results, the adoption of a progressive dividend policy, intending to maintain or grow the dividend each year. After providing for business investment, funding the progressive dividend policy and meeting our debt service obligations, the Board will also keep under review the opportunity to return cash in excess of these requirements to shareholders through periodic share repurchases.
The Board has recommended a second interim dividend of $1.95, a 5% increase over the second interim dividend awarded in 2010. This brings the dividend for the full year to $2.80 (175.5 pence, SEK 18.54), an increase of 10% from 2010. In 2011, cash distributions to shareholders through dividends totalled $3,764 million and net share repurchases totalled $5,606 million.
Appreciation
In the face of intensified pressures we delivered a good performance in 2011 and took difficult decisions to ensure the future success of AstraZeneca. None of this would have been possible without the leadership of David Brennan and the other members of his executive team. My thanks, and those of the whole Board, go to them and all our employees for their effort in working to deliver on our promise.
Louis Schweitzer
Chairman
CEO's review
A trusted partner
We cannot secure our success if we do not have good relationships with those with whom we do business. Trust is critical to achieving this: we need to connect with our stakeholders, including patients, physicians, regulators, governments and payers, if we are to understand their needs and challenges. We also need to earn and maintain the trust of our customers, partners and other stakeholders. This requires us to do things in the right way and to behave in accordance with our core values.
That is why I set such store by our Global External Interactions Policy, launched in April 2011, which provides a single, common, principle-based approach to all our interactions worldwide with public officials, healthcare professionals and community organisations. The introduction of the policy drove changes in the way we market and sell our products and I believe we now lead the industry in this area of business.
Our commitment to acting responsibly and the sustainable development of our Group was further reinforced in 2011 by the publication of our new Responsible Business Plan, which is closely aligned to our business strategy and its priorities.
The growing importance of compliance and ethics to our reputation and business operations was demonstrated during the year by the appointment of Katarina Ageborg, our new Chief Compliance Officer, to the SET.
World class Research and Development
At the core of our strategy to be a focused, integrated, innovation-driven, global, prescription-based biopharmaceutical business is the need to have an R&D function with world class productivity. In his Chairman's Statement above, Louis Schweitzer outlined how we are redoubling our efforts to deliver this through the use of innovative and collaborative ways of working. Our focus is on ensuring more effective and efficient delivery of our research objectives across our therapeutic portfolio.
Our results in 2011 were mixed. We were pleased by the FDA's approval in July of Brilinta, our treatment for acute coronary syndromes. Brilinta, or Brilique, its trade name in Europe, is now approved in 64 countries, launched in 37 and under review in a further 39. Also on a positive note, Caprelsa (vandetanib), for the treatment of thyroid cancer, has been launched in the US and received a positive CHMP opinion in the EU. Axanum, for the prevention of cardiovascular events, Komboglyze™, for diabetes, and Fluenz, our influenza vaccine, were also approved in the EU. In Japan, both Nexium and Faslodex were launched following approvals earlier in the year.
During 2011, two of the Phase III trials for TC-5214, our neuroscience collaboration with Targacept, did not meet their primary endpoint. In December, we also announced that our investigational compound olaparib (AZD2281) for the treatment of ovarian cancer will not progress into Phase III. As a result of these two events we recorded an impairment charge of $435 million.
We were also disappointed during the year by the withdrawal of zibotentan (for prostate cancer). Axanum was also withdrawn in the US. In January 2012, we received a Complete Response Letter from the FDA for our submission for dapagliflozin. We, together with BMS, remain committed to this treatment for diabetes and will work closely with the FDA to provide additional clinical data.
Increased collaboration
Our focus on developing in-house capabilities is matched by our desire to develop a more outward-looking organisation committed to accessing the best science, regardless of its origin. Indeed, six of our nine projects in Phase III/Registration and 12 out of 24 in Phase II were sourced externally.
During 2011, we completed a number of transactions to strengthen our long-term development. These included the in-licensing of tremelimumab from Pfizer, and our groundbreaking collaboration with the UK Medical Research Council providing academic researchers with access to over 20 AstraZeneca compounds. Our plans for R&D will see us build further on this collaborative way of working.
Global orientation
Our future success requires us to develop global strategies to commercialise our products effectively. These need to be tailored to local needs in both mature and emerging markets.
As part of that drive, we announced our decision to invest $200 million in a manufacturing facility in China and our agreement to acquire a Chinese company that will give us access to a portfolio of medicines used to treat infections. In Russia, we invested $150 million in a manufacturing plant and announced plans to establish a new predictive science centre.
We are also committed to playing our part in the global challenge of providing sustainable access to healthcare for all those who need it. Our strategy recognises the complexities surrounding the issue which range from the affordability of medicines to the availability of healthcare systems and the resources to make them effective.
Stronger customer orientation
As the Chairman noted, there is no let up in sight on the downward pressure we face on the price of medicines. More than ever, we need to demonstrate their value to those who buy them. Our collaborations with HealthCore and IMS will help us undertake 'real world' studies to understand how to treat disease most effectively and economically. We also need to undertake more studies such as the Brilinta PLATO study demonstrating that, even at a higher price, it is a more cost effective treatment than the generic alternative.
Equally, we need to recognise the changing shape of healthcare systems. Those who work in them are working more intensively and with less time to research medicines. We are therefore piloting new ways of working to meet their needs. These include the use of digital channels which offer information that is available when it is needed, and without having to leave the office.
Operational efficiency
Our continued drive for operational efficiency is typified by the design and construction of our new plant in China, which is using 'Lean' production principles from the outset. We are also streamlining processes and moving to a more flexible cost base in order to remain competitive.
As we reshape our business to meet the needs of our customers efficiently, we are seeing reductions in the workforce across much of our organisation, particularly in our mature Established Markets and in our R&D organisation. This reshaping includes plans for further R&D site consolidation. These are difficult decisions as they go to the heart of AstraZeneca, our people. Where possible, we seek to redeploy staff or assist with outplacement and, together with my colleagues, I remain committed to managing these changes in the right way, in accordance with local employment laws, our standards and core values.
A confident future
Our industry is undergoing a period of fundamental change. If we are to be one of the winners in the sector we need to make the necessary changes both to what we do and how we do it. I am confident that within AstraZeneca we have people with the skills to do that and pay tribute to their continued efforts in 2011 to ensure we deliver on our commitments to patients, society and our shareholders. I look forward to working with them to build on those efforts in 2012.
David R Brennan
Chief Executive Officer
Financial Review
Core operating profit was down 4%. Core R&D expense included a significant increase in intangible impairments compared with last year; without these, Core operating profit would have declined broadly in line with the revenue. Core earnings per share increased by 7%, benefiting from a lower tax rate and fewer shares outstanding as a result of share repurchases.
The actions related to the first two phases of our restructuring programmes are now completed, and are on track to deliver $4.3 billion in annual benefits by the end of 2014. These programmes have played an integral part in the significant improvement in our Core operating margin since they were launched in early 2007.
A new phase was announced in February 2012, and this programme is expected to deliver a further $1.6 billion in annual benefits by the end of 2014, at a planned cost of $2.1 billion.
Our cash generation remains strong, enabling us to invest for future growth and value by funding organic investment in R&D, externalisation and capital expenditures while also providing $9.4 billion in net cash distributions to shareholders by way of dividends and net share repurchases.
Simon Lowth
Chief Financial Officer
The purpose of this Financial Review is to provide a balanced and comprehensive analysis of the financial performance of the business during 2011, the financial position as at the end of the year and the main business factors and trends which could affect the future financial performance of the business.
All growth rates in this Financial Review are expressed at CER unless noted otherwise.
2011 Business background and results overview
The business background is covered in the pharmaceutical industry section from page 15, the Therapy Area Review from page 56, and the Geographical Review from page 77 and describes in detail the developments in both our products and geographical regions.
As described earlier in our Annual Report, sales of our products are directly influenced by medical need and are generally paid for by health insurance schemes or national healthcare budgets. Our operating results can be affected by a number of factors other than the delivery of operating plans and normal competition, such as:
· The adverse impact on pharmaceutical prices as a result of the macroeconomic and regulatory environment. For instance, although there is no direct governmental control on prices in the US, action from federal and individual state programmes and health insurance bodies is leading to downward pressures on realised prices. In other parts of the world, there is a variety of price and volume control mechanisms and retrospective rebates based on sales levels that are imposed by governments.
· The risk of generic competition following loss of patent protection or patent expiry or an 'at risk' launch by a competitor, with the potential adverse effects on sales volumes and prices. For example in 2011, our performance was affected by generic competition in the US for Arimidex and Toprol-XL. Further details of patent expiries for our key marketed products are included in the Patent expiries section on page 35.
· The timings of new product launches, which can be influenced by national regulators, and the risk that such new products do not succeed as anticipated, together with the rate of sales growth and costs following new product launches.
· Currency fluctuations. Our functional and reporting currency is the US dollar, but we have substantial exposures to other currencies, in particular the euro, Japanese yen, pound sterling and Swedish krona.
· Macro factors such as greater demand from an ageing population and increasing requirements of servicing Emerging Markets.
Over the longer term, the success of our R&D is crucial and we devote substantial resources to this area. The benefits of this investment emerge over the long term and there is considerable inherent uncertainty as to whether and when it will generate future products.
The most significant features of our financial results in 2011 are:
· Revenue was down 2% at $33,591 million (Reported: up 1%).
· Strong double digit sales growth at CER for Crestor, Seroquel XR and Symbicort.
· Emerging Markets revenue increased by 10% (Reported: 11%).
· Revenue performance reflects the loss of nearly $2 billion of revenue from generic competition, as well as a further $1 billion lost to the impact of government price interventions.
· Core operating profit was down 4% (Reported: 3%) to $13,167 million.
· Operating profit up 10% (Reported: 11%) to $12,795 million.
· The sale of Astra Tech, which resulted in a gain of $1,483 million and was excluded from Core operating profit.
· Core operating margin of 39.2% of revenue was down 1.2 percentage points (Reported: 1.6 percentage points), as benefits arising from higher gross margin and lower SG&A spend at CER were more than offset by increased expenditures in R&D and lower Core other income. Reported operating margin was 38.1%.
· Core EPS increased by 7% (Reported: 9%) to $7.28. Basic EPS was up 29% (Reported: 31%) to $7.33. Basic and Core EPS benefited from the lower number of shares outstanding resulting from net share repurchases and a lower effective tax rate compared with last year.
· Dividends paid increased to $3,764 million (2010: $3,361 million). Net share repurchases totalled $5,606 million.
· Total restructuring costs associated with the global programme to reshape the cost base of the business were $1,161 million in 2011. This brings the total restructuring costs charged to 31 December 2011 to $4,869 million.
Measuring performance
The following measures are referred to when reporting on our performance both in absolute terms but more often in comparison to earlier years in this Financial Review:
· Reported performance. Reported performance takes into account all the factors (including those which we cannot influence, principally currency exchange rates) that have affected the results of our business as reflected in our Group Financial Statements prepared in accordance with IFRSs as adopted by the EU and as issued by the IASB.
· Core financial measures. These are non-GAAP measures because, unlike Reported performance, they cannot be derived directly from the information in the Group's Financial Statements. These measures are adjusted to exclude certain significant items, such as charges and provisions related to our global restructuring programmes, amortisation and impairment of the significant intangibles relating to the acquisition of MedImmune in 2007, the amortisation and impairment of the significant intangibles relating to our current and future exit arrangements with Merck in the US and other specified items. See the 2011 Reconciliation of Reported results to Core results table on page 85 for a reconciliation of Reported to Core performance.
· Constant exchange rate (CER) growth rates. These are also non-GAAP measures. These measures remove the effects of currency movements (by retranslating the current year's performance at previous year's exchange rates and adjusting for other exchange effects, including hedging). A reconciliation of the Reported results adjusted for the impact of currency movements is provided in the 2011 Reported operating profit table on page 85.
· Gross and operating profit margin percentages, and Core pre-R&D operating margin. These measures set out the progression of key performance margins and illustrate the overall quality of the business. Core pre-R&D operating margin is a non-GAAP measure of our Core financial performance. A reconciliation of Core pre-R&D operating margin to our operating profit is provided on pages 85 and 91.
· Prescription volumes and trends for key products. These measures can represent the real business growth and the progress of individual products better and more immediately than invoiced sales.
· Net funds/debt. This represents our cash and cash equivalents, current investments and derivative financial instruments less interest-bearing loans and borrowings.
CER measures allow us to focus on the changes in sales and expenses driven by volume, prices and cost levels relative to the prior period. Sales and cost growth expressed in CER allows management to understand the true local movement in sales and costs, in order to compare recent trends and relative return on investment. CER growth rates can be used to analyse sales in a number of ways but, most often, we consider CER growth by products and groups of products, and by countries and regions. CER sales growth can be further analysed into the impact of sales volumes and selling price. Similarly, CER cost growth helps us to focus on the real local change in costs so that we can manage the cost base effectively.
We believe that disclosing Core financial and growth measures in addition to our Reported financial information enhances investors' ability to evaluate and analyse the underlying financial performance of our ongoing business and the related key business drivers. The adjustments made to our Reported financial information in order to show Core financial measures illustrate clearly, and on a year-on-year or period-by-period basis, the impact upon our performance caused by factors such as changes in sales and expenses driven by volume, prices and cost levels relative to such prior years or periods.
As shown in the 2011 Reconciliation of Reported results to Core results table on page 85, our reconciliation of Reported financial information to Core financial measures includes a breakdown of the items for which our Reported financial information is adjusted and a further breakdown of those items by specific line item as such items are reflected in our Reported income statement. This illustrates the significant items that are excluded from Core financial measures and their impact on our Reported financial information, both as a whole and in respect of specific line items.
Core pre-R&D operating margin is our Core operating margin before research and development costs recorded in the year. This measure reflects Core operating performance before reinvestment in internal research and development.
Management presents these results externally to meet investors' requirements for transparency and clarity. Core financial measures are also used internally in the management of our business performance, in our budgeting process and when determining compensation.
Core financial measures are non-GAAP adjusted measures. All items for which Core financial measures are adjusted are included in our Reported financial information as they represent actual costs of our business in the periods presented. As a result, Core financial measures merely allow investors to differentiate between different kinds of costs and they should not be used in isolation. You should also refer to our Reported financial information in the 2011 Reported operating profit table on page 85, our reconciliation of Core financial measures to Reported financial information in the Reconciliation of Reported results to Core results table on page 85, and to the Results of operations - summary analysis of year to 31 December 2010 section from page 91 for our discussion of comparative Reported growth measures that reflect all factors that affect our business. Our determination of non-GAAP measures, and our presentation of them within this financial information, may differ from similarly titled non-GAAP measures of other companies.
The SET retains strategic management of the costs excluded from Reported financial information in arriving at Core financial measures, tracking their impact on Reported operating profit and EPS, with operational management being delegated on a case-by-case basis to ensure clear accountability and consistency for each cost category.
Results of operations - summary analysis of year to 31 December 2011
2011 Reported operating profit
|
|
2011 |
|
2010 |
|
Percentage of sales |
|
2011 compared with 2010 |
||||
|
|
Reported $m |
CER growth $m |
Growth due to exchange effects $m |
|
Reported $m |
|
Reported 2011 % |
Reported 2010 % |
|
CER growth % |
Reported growth % |
|
Revenue |
33,591 |
(601) |
923 |
|
33,269 |
|
|
|
|
(2) |
1 |
|
Cost of sales |
(6,026) |
625 |
(262) |
|
(6,389) |
|
(17.9) |
(19.2) |
|
(10) |
(6) |
|
Gross margin |
27,565 |
24 |
661 |
|
26,880 |
|
82.1 |
80.8 |
|
- |
3 |
|
Distribution costs |
(346) |
3 |
(14) |
|
(335) |
|
(1.0) |
(1.0) |
|
(1) |
3 |
|
Research and development |
(5,523) |
(15) |
(190) |
|
(5,318) |
|
(16.5) |
(16.0) |
|
- |
4 |
|
Selling, general and administrative costs |
(11,161) |
(409) |
(307) |
|
(10,445) |
|
(33.2) |
(31.4) |
|
4 |
7 |
|
Profit on disposal of Astra Tech |
1,483 |
1,483 |
- |
|
- |
|
4.4 |
- |
|
n/a |
n/a |
|
Other operating income and expense |
777 |
59 |
6 |
|
712 |
|
2.3 |
2.1 |
|
8 |
9 |
|
Operating profit |
12,795 |
1,145 |
156 |
|
11,494 |
|
38.1 |
34.5 |
|
10 |
11 |
|
Net finance expense |
(428) |
|
|
|
(517) |
|
|
|
|
|
|
|
Profit before tax |
12,367 |
|
|
|
10,977 |
|
|
|
|
|
|
|
Taxation |
(2,351) |
|
|
|
(2,896) |
|
|
|
|
|
|
|
Profit for the period |
10,016 |
|
|
|
8,081 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share ($) |
7.33 |
|
|
|
5.60 |
|
|
|
|
|
|
2011 Core operating results
|
|
|
|
2011 |
|
2010 |
|
2011 compared with 2010 |
|
|
|
Core $m |
CER growth $m |
Growth due to exchange effects $m |
|
Core $m |
|
CER growth % |
Total Core growth % |
|
Gross margin |
27,619 |
(63) |
658 |
|
27,024 |
|
- |
2 |
|
Gross margin % |
82.2% |
|
|
|
81.2% |
|
|
|
|
Distribution costs |
(346) |
3 |
(14) |
|
(335) |
|
(1) |
3 |
|
Research and development |
(5,033) |
(639) |
(175) |
|
(4,219) |
|
15 |
19 |
|
Selling, general and administrative costs |
(9,918) |
160 |
(301) |
|
(9,777) |
|
(2) |
1 |
|
Other operating income and expense |
845 |
(71) |
6 |
|
910 |
|
(8) |
(7) |
|
Operating profit |
13,167 |
(610) |
174 |
|
13,603 |
|
(4) |
(3) |
|
Operating margin % |
39.2% |
|
|
|
40.8% |
|
|
|
|
Net finance expense |
(428) |
|
|
|
(517) |
|
|
|
|
Profit before tax |
12,739 |
|
|
|
13,086 |
|
|
|
|
Taxation |
(2,797) |
|
|
|
(3,416) |
|
|
|
|
Profit for the period |
9,942 |
|
|
|
9,670 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share ($) |
7.28 |
|
|
|
6.71 |
|
|
|
2011 Reconciliation of Reported results to Core results
|
|
2011 Reported $m |
Restructuring costs $m |
Merck & MedImmune |
|
Profit on sale of Astra Tech $m |
|
|
|
Amortisation $m |
Intangible impairments $m |
Legal settlements $m |
2011 Core $m |
||||
|
Gross margin |
27,565 |
54 |
- |
- |
- |
- |
27,619 |
|
Distribution costs |
(346) |
- |
- |
- |
- |
- |
(346) |
|
Research and development |
(5,523) |
468 |
- |
22 |
- |
- |
(5,033) |
|
Selling, general and administrative costs |
(11,161) |
639 |
469 |
- |
135 |
- |
(9,918) |
|
Profit on disposal of Astra Tech |
1,483 |
- |
- |
- |
- |
(1,483) |
- |
|
Other operating income and expense |
777 |
- |
68 |
- |
- |
- |
845 |
|
Operating profit |
12,795 |
1,161 |
537 |
22 |
135 |
(1,483) |
13,167 |
|
Add back: Research and development |
5,523 |
(468) |
- |
(22) |
- |
- |
5,033 |
|
Pre-R&D operating margin |
18,318 |
693 |
537 |
- |
135 |
(1,483) |
18,200 |
|
Pre-R&D operating margin % |
54.5% |
|
|
|
|
|
54.2% |
|
Net finance expense |
(428) |
- |
- |
- |
- |
- |
(428) |
|
Profit before tax |
12,367 |
1,161 |
537 |
22 |
135 |
(1,483) |
12,739 |
|
Taxation |
(2,351) |
(306) |
(98) |
(6) |
(36) |
- |
(2,797) |
|
Profit for the period |
10,016 |
855 |
439 |
16 |
99 |
(1,483) |
9,942 |
|
|
|
|
|
|
|
|
|
|
Basic earnings per share ($) |
7.33 |
0.63 |
0.32 |
0.01 |
0.07 |
(1.08) |
7.28 |
Results of operations - summary analysis of year to 31 December 2011 continued
Revenue increased by 1% on a Reported basis but decreased by 2% on a CER basis. As in 2010, revenue benefited from strong growth of Crestor, Symbicort and Seroquel but was offset by lower revenues for Nexium, Arimidex and Seloken/Toprol-XL. Emerging Markets sales growth of 10% (Reported: 11%) and Established ROW 4% (Reported: 14%) was offset by a decline in US sales of 2% (Reported: 2%) and Western Europe of 11% (Reported: 7%). Further details of our sales performance are contained in the Performance 2011 sections of the Therapy Area Review from page 56 and the Geographical Review from page 77.
Core gross margin of 82.2% increased 1.3 percentage points (Reported: 1.0 percentage points). The year-on-year improvement in the margin was largely due to the impact of the intangible impairment related to lesogaberan on 2010 gross margin and a $131 million benefit from the settlement of patent disputes with PDL Biopharma Inc. in 2011.
Core R&D expenditure was $5,033 million, 15% higher than last year (Reported: 19%), driven by higher intangible impairments charged to R&D expenditure in 2011, including $285 million for olaparib and $150 million for TC-5214, and late stage project spend.
Core SG&A costs of $9,918 million were 2% lower than in 2010 (Reported: 1% higher). Investment in Emerging Markets and recently launched brands, as well as the impact of the US healthcare reform excise tax were more than offset by operational efficiencies across Established Markets.
Core other income of $845 million was $65 million less than the previous year principally as a result of a higher level of disposal gains in 2010.
Core pre-R&D operating margin was 54.2%, up 1.0 percentage points (Reported: 0.7 percentage points), as the higher gross margin was only slightly offset by lower Core other income and higher SG&A costs as a percentage of revenue.
Core operating profit was $13,167 million, a decrease of 4% (Reported: 3%). Core operating margin declined by 1.2 percentage points (Reported: 1.6 percentage points) to 39.2% as a result of the higher R&D spend and lower Core other operating income.
Core EPS were $7.28, up 7% (Reported: 9%), with the lower operating profit offset by a lower effective tax rate, lower net interest as well as the benefit of a lower average number of shares outstanding.
Within Core adjustments, restructuring costs and amortisation were broadly in line with last year's level. Non-core intangible impairments and legal provisions were significantly reduced from 2010. In 2011, Core adjustments also included the profit on the sale of our dental and healthcare subsidiary Astra Tech. Excluded from Core results were:
· Impairment charges of $22 million (2010: $568 million), arising from impairments of assets capitalised as part of the MedImmune acquisition.
· $135 million (2010: $612 million) of legal provision charges in respect of the ongoing Seroquel product liability litigation, Average Wholesale Price litigation in the US and the Toprol-XL antitrust litigation. In line with prior years these have been excluded from our Core performance and full details of these matters are included in Note 25 to the Financial Statements from page 184.
· Restructuring costs totalling $1,161 million (2010: $1,202 million), incurred as the Group continues its previously announced efficiency programmes.
· Amortisation totalling $537 million (2010: $518 million) relating to assets capitalised as part of the MedImmune acquisition and the Merck exit arrangements.
· Profit on sale of our subsidiary Astra Tech of $1,483 million. On 31 August, we completed the sale of Astra Tech to DENTSPLY International Inc. for a net cash consideration of $1,772 million. Further details of this disposal are included in Note 22 to the Financial Statements on page 170.
Reported operating profit was up 10% at CER (Reported: 11%) at $12,795 million, largely as a result of the impact of the profit on the disposal of Astra Tech. Reported EPS were $7.33, up 29% (Reported: 31%), as a result of the same factors affecting Core EPS along with the profit recognised on the disposal of Astra Tech.
Net finance expense was $428 million, against $517 million in 2010, due to reduced interest payable on lower debt balances ($46 million) and a lower net pension interest expense of $55 million principally due to increased pension assets held by our defined benefit schemes.
The 2011 taxation charge of $2,351 million (2010: $2,896 million) consists of a current tax charge of $2,578 million (2010: $3,435 million) and a credit arising from movements on deferred tax of $227 million (2010: $539 million).
The current year tax charge includes a prior period current tax credit of $102 million (2010: charge of $370 million). The reported effective tax rate for the year was 19.0% (2010: 26.4%). The reported effective tax rate has benefited from the non-taxable gain on the disposal of Astra Tech and an adjustment in respect of prior periods following the announcement in March 2011 that HM Revenue & Customs in the UK and the US Internal Revenue Service (IRS) agreed the terms of an Advance Pricing Agreement regarding transfer pricing arrangements for AstraZeneca's US business for the period from 2002 to the end of 2014 and a related valuation matter as detailed more fully in Note 4 to the Financial Statements from page 152. Excluding these benefits, the effective tax rate for the year was 26.4% on a reported basis. This 26.4% tax rate is applied to the taxable Core adjustments to operating profit, resulting in a Core effective tax rate for the year of 22.0% including the benefit of the Advanced Pricing Agreement and related valuation matter settlement. A description of our tax exposures is set out in Note 25 to the Financial Statements on page 189.
Total comprehensive income for the year increased by $1,364 million from 2010 to $9,470 million. This was driven by the increase in profit for the year of $1,935 million, offset by a decrease of $571 million in other comprehensive income, principally due to $741 million of actuarial losses on our defined benefit schemes arising from lower discount rates being applied to our long-term pension obligations reflecting external market conditions.
Cash flow and liquidity - 2011
All data in this section is on a Reported basis.
Cash generated from operating activities was $7,821 million in the year to 31 December 2011, compared with $10,680 million in 2010. The decrease of $2,859 million is primarily driven by higher tax payments made this year, including a net amount of $1.1 billion in relation to the Advance Pricing Agreement between the UK and US governments' tax authorities and the settlement of a related valuation matter, an increase in trade and other receivables and higher contributions made to our UK defined benefit pension fund.
Investment cash inflows of $577 million include the sale of Astra Tech ($1,772 million). Cash outflows on the purchase of tangible fixed assets amounted to $839 million in the year, in line with 2010. Further details of the Astra Tech disposal are included in Note 22 to the Financial Statements from page 170.
Net cash distributions to shareholders increased from $5,471 million in 2010 to $9,370 million in 2011 through dividend payments of $3,764 million and net share repurchases of $5,606 million, a significant increase on 2010 repurchases of $2,110 million. This reflects the Board's 2010 stated objective of $4 billion share repurchases in 2011, with the target increased in 2011 following the Board's decision to use the net proceeds from the Astra Tech sale to increase share repurchases.
Summary cash flows
|
|
2011 $m |
2010 $m |
2009 $m |
|
Net funds/(debt) brought forward at 1 January |
3,653 |
535 |
(7,174) |
|
Earnings before interest, tax, depreciation, amortisation and impairment (EBITDA) |
15,345 |
14,235 |
13,630 |
|
Profit on disposal of Astra Tech |
(1,483) |
- |
- |
|
EBITDA before profit on disposal of Astra Tech |
13,862 |
14,235 |
13,630 |
|
Movement in working capital and provisions |
(897) |
82 |
1,329 |
|
Tax paid |
(3,999) |
(2,533) |
(2,381) |
|
Interest paid |
(548) |
(641) |
(639) |
|
Other non-cash movements |
(597) |
(463) |
(200) |
|
Net cash available from operating activities |
7,821 |
10,680 |
11,739 |
|
Purchase of intangibles (net) |
(458) |
(1,180) |
(355) |
|
Other capital expenditure (net) |
(737) |
(708) |
(824) |
|
Acquisitions |
- |
(348) |
- |
|
Net cash received on disposal of Astra Tech |
1,772 |
- |
- |
|
Investments |
577 |
(2,236) |
(1,179) |
|
Dividends |
(3,764) |
(3,361) |
(2,977) |
|
Net share (repurchases)/issues |
(5,606) |
(2,110) |
135 |
|
Distributions |
(9,370) |
(5,471) |
(2,842) |
|
Other movements |
168 |
145 |
(9) |
|
Net funds carried forward at 31 December |
2,849 |
3,653 |
535 |
Net funds
|
|
2011 $m |
2010 $m |
2009 $m |
|
Cash and cash equivalents |
7,571 |
11,068 |
9,918 |
|
Short-term investments |
4,248 |
1,482 |
1,484 |
|
Net derivative financial instruments |
358 |
325 |
196 |
|
Cash, short-term investments and derivatives |
12,177 |
12,875 |
11,598 |
|
Overdraft and short-term borrowings |
(221) |
(125) |
(136) |
|
Current instalments of loan |
(1,769) |
- |
(1,790) |
|
Loans due after one year |
(7,338) |
(9,097) |
(9,137) |
|
Loans and borrowings |
(9,328) |
(9,222) |
(11,063) |
|
Net funds |
2,849 |
3,653 |
535 |
At 31 December 2011, outstanding gross debt (interest-bearing loans and borrowings) was $9,328 million (2010: $9,222 million). Of this gross debt, $1,990 million is due within one year (2010: $125 million).
Closing net funds include $3,765 million of US Treasury Bills with a maturity date greater than 90 days. These are included in short-term investments. Net funds of $2,849 million have decreased by $804 million during the year as a result of the net cash outflow described above.
Off-balance sheet transactions and commitments
We have no off-balance sheet arrangements and our derivative activities are non-speculative. The table below sets out our minimum contractual obligations at the year end.
Payments due by period
|
|
Less than 1 year $m |
1-3 years $m |
3-5 years $m |
Over 5 years $m |
2011 Total $m |
2010 Total $m |
|
Bank loans and other borrowings |
2,493 |
1,574 |
1,684 |
9,764 |
15,515 |
15,964 |
|
Operating leases |
92 |
116 |
62 |
122 |
392 |
506 |
|
Contracted capital expenditure |
190 |
- |
- |
- |
190 |
259 |
|
Total |
2,775 |
1,690 |
1,746 |
9,886 |
16,097 |
16,729 |
Financial position - 2011
All data in this section is on a Reported basis.
Summary statement of financial position
|
|
2011 $m |
Movement $m |
2010 $m |
Movement $m |
2009 $m |
|
Property, plant and equipment |
6,425 |
(532) |
6,957 |
(350) |
7,307 |
|
Goodwill and intangible assets |
20,842 |
(1,187) |
22,029 |
(86) |
22,115 |
|
|
|
|
|
|
|
|
Inventories |
1,852 |
170 |
1,682 |
(68) |
1,750 |
|
Trade and other receivables |
8,754 |
907 |
7,847 |
138 |
7,709 |
|
Trade and other payables |
(9,360) |
(326) |
(9,034) |
(103) |
(8,931) |
|
Provisions |
(1,862) |
76 |
(1,938) |
(252) |
(1,686) |
|
|
|
|
|
|
|
|
Net income tax payable |
(2,334) |
1,521 |
(3,855) |
(1,002) |
(2,853) |
|
Net deferred tax liabilities |
(1,221) |
449 |
(1,670) |
285 |
(1,955) |
|
|
|
|
|
|
|
|
Retirement benefit obligations |
(2,674) |
(202) |
(2,472) |
882 |
(3,354) |
|
|
|
|
|
|
|
|
Non-current other investments |
201 |
(10) |
211 |
27 |
184 |
|
Net funds |
2,849 |
(804) |
3,653 |
3,118 |
535 |
|
|
|
|
|
|
|
|
Net assets |
23,472 |
62 |
23,410 |
2,589 |
20,821 |
In 2011, net assets increased by $62 million to $23,472 million. The increase in net assets as a result of the Group profit of $10,016 million was offset by dividends of $3,752 million and share repurchases of $6,015 million.
Property, plant and equipment
Property, plant and equipment decreased by $532 million to $6,425 million. Additions of $807 million (2010: $808 million) were offset by depreciation of $1,086 million (2010: $1,076 million) and disposals of $233 million (2010: $73 million), including $151 million of assets on the sale of Astra Tech.
Goodwill and intangible assets
Our goodwill of $9,862 million (2010: $9,871 million) principally arose on the acquisition of MedImmune and the restructuring of our US joint venture with Merck in 1998. No goodwill has been capitalised in 2011.
Intangible assets amounted to $10,980 million at 31 December 2011 (2010: $12,158 million). Intangible asset additions were $442 million in 2011 (2010: $1,791 million), amortisation was $911 million (2010: $810 million) and impairments totalled $553 million (2010: $833 million). $113 million of assets were disposed of on the sale of Astra Tech.
Intangible asset impairment charges recorded in 2011 include $285 million following the termination of development of olaparib for the maintenance treatment of serous ovarian cancer and an impairment of $150 million reflecting a lower probability of success assessment for TC-5214, based on the results of the first two of four Phase III efficacy and tolerability studies. See pages 72 and 68 respectively of the Therapy Area Review for more information.
Included within our intangible assets are rights we have acquired as a result of our Merck termination arrangements. Further details of these arrangements are included in Note 25 to the Financial Statements from page 181. 2012 is the first year that AstraZeneca may exercise the second (and final) option in relation to these termination arrangements. If the option is exercised in 2012, this will effectively end AstraZeneca's relationships with, and obligations to, Merck (other than some residual manufacturing arrangements).
Receivables, payables and provisions
Trade receivables increased by $383 million to $6,630 million driven, principally, by higher gross sales in the US in December 2011 and the way calendar working days fell at the 2011 year end. Other receivables increased by $566 million to $1,237 million driven by an increase in our Seroquel related settlement funds.
Included within trade receivables is approximately $650 million of net receivables, representing 10% of our trade receivables, due from customers in eurozone countries that have a sovereign credit rating of A or lower (Spain $300 million, Italy $270 million, Portugal $50 million and Greece $30 million). Within this balance is approximately $230 million of overdue government debt. In light of current market conditions, debts within these euro countries have been subject to enhanced monitoring and scrutiny by the Group. Our bad debt provisioning against these debts reflects our current estimate of the recoverability of these balances based on consideration of a number of factors such as the status of current negotiations, past payment history and individual countries' budget constraints. In 2011, our revenue from these four countries was $1,113 million (Italy), $709 million (Spain), $305 million (Greece) and $223 million (Portugal).
Trade and other payables increased by $326 million in 2011, driven by increases in accruals of $177 million and rebates and chargebacks of $446 million, offset by a decrease in other payables of $215 million. The increase in rebates and chargebacks arose principally from increased managed-care and group purchasing organisation rebates. Further details of the movements on rebates and chargebacks are included on page 94.
The movement in provisions of $76 million in 2011 includes $716 million of additional charges recorded in the year, offset by $657 million of cash payments. Included within the $716 million of charges for the year is $135 million in respect of legal charges and $450 million for our global restructuring initiative. Cash payments of $657 million include $377 million against our ongoing global restructuring initiatives and $153 million related to legal matters. Further details of the charges made against our provisions are contained in Notes 17 and 25 to the Financial Statements.
Tax payable and receivable
Net income tax payable has decreased by $1,521 million to $2,334 million, principally due to the payment of a net amount of $1.1 billion in relation to the Advance Pricing Agreement between the UK and US governments' tax authorities and the settlement of a related valuation matter. Our tax receivable balance of $1,056 million largely comprises tax owing to AstraZeneca from certain governments expected to be received on settlements of transfer pricing audits and disputes (see Note 25 to the Financial Statements on page 189). Net deferred tax liabilities reduced by $449 million in the year.
Retirement benefit obligations
Net retirement benefit obligations increased by $202 million, due to an increase in post-retirement scheme obligations of $954 million driven by a reduction in the discount rate applied to long-term scheme obligations, reflecting present market conditions for corporate bonds, offset by pension fund employer contributions made in the year of $733 million (2010: $469 million) as detailed in Note 18 to the Financial Statements from page 165.
In recent years the Group has undertaken several initiatives to reduce its net pension obligation exposure. For the UK defined benefit pension scheme, which represents AstraZeneca's largest defined benefit scheme, these initiatives have included agreeing funding principles for cash contributions to be paid to the UK pension scheme to target a level of assets in excess of the current expected cost of providing benefits, and, in 2010, amendments to the scheme to freeze pensionable pay at 30 June 2010 levels (reducing the pension fund obligation by $693 million). In addition to the cash contributions to be paid into the UK pension scheme, AstraZeneca makes contributions to an escrow account which is held outside the pension scheme. The escrow account assets are payable to the fund in agreed circumstances, for example, in the event of AstraZeneca and the pension fund trustee agreeing on a change to the current long-term investment strategy.
AstraZeneca has agreed to fund the UK defined benefit scheme shortfall by making lump sum payments totalling £715 million ($1,103 million) before 30 June 2013. The first of these lump sum payments of £180 million ($278 million) was paid into the pension scheme from the escrow account in December 2011. A further £300 million ($463 million) was paid into the pension scheme during January 2012 with the balance payable by 30 June 2013. In 2011, £132 million ($213 million) was paid into the escrow account and a further £230 million ($355 million) was paid in during January 2012. At 31 December 2011, $296 million escrow fund assets are included within other investments (as detailed in Note 10 to the Financial Statements on page 160).
In 2011, approximately 96.7% (2010: 96.5%) of the Group's obligations were concentrated in the UK, the US, Sweden and Germany. Further details of the Group's pension schemes are included in Note 18 to the Financial Statements from page 165.
Commitments and contingencies
The Group has commitments and contingencies which are accounted for in accordance with the accounting policies described in the Financial Statements in the Group Accounting Policies section from page 146. The Group also has taxation contingencies. These are described in the Taxation section in the Critical accounting policies and estimates section on page 97 and in Note 25 to the Financial Statements from page 189.
Research and development collaboration payments
Details of future potential research and development collaboration payments are also included in Note 25 to the Financial Statements from page 181. As detailed in Note 25, payments to our collaboration partners may not become payable due to the inherent uncertainty in achieving the development and revenue milestones linked to the future payments. As part of our overall externalisation strategy, we may enter into further collaboration projects in the future that may include milestone payments and, therefore, as certain milestone payments fail to crystallise due to, for example, development not proceeding, they may be replaced by potential payments under new collaborations.
Investments, divestments and capital expenditure
As detailed earlier in the Research and Development section from page 30, AstraZeneca views collaborations, including externalisation arrangements in the field of research and development, as a crucial element of the development of our business.
The Group has completed over 90 major externalisation transactions over the past three years, one of which was a business acquisition and all others were strategic alliances and collaborations. Details of our business acquisitions and disposals in the past three years are contained in Note 22 to the Financial Statements from page 170. Details of our significant externalisation transactions are given below:
· In January 2007, AstraZeneca signed an exclusive co-development and co-promotion agreement with BMS for the development and commercialisation of saxagliptin, a dipeptidyl peptidase IV inhibitor (DPP-IV) and dapagliflozin, a selective sodium-glucose co-transporter 2 (SGLT2) inhibitor, both for the treatment of Type 2 diabetes. The agreement is global with the exception of Japan for saxagliptin. Under each agreement the two companies jointly develop the clinical and marketing strategy and share development and commercialisation expenses on a global basis. To date, AstraZeneca has made upfront and milestone payments totalling $300 million for saxagliptin and $170 million for dapagliflozin and may make future milestone payments of $230 million on dapagliflozin contingent on achievement of regulatory milestones and launch in key markets. Following launch, profits and losses globally are shared equally and an additional $300 million of sales-related payments for each product may be triggered based on worldwide sales success. The Group made milestone payments to BMS of $120 million in 2011, $50 million in 2010 and $150 million in 2009.
· In December 2009, AstraZeneca and Targacept entered into an in-licence agreement for AstraZeneca to obtain exclusive global development and commercialisation rights to Targacept's investigational product for major depressive disorder (MDD), TC-5214. Under the deal, AstraZeneca made an upfront payment of $200 million and may make milestone payments to a maximum of $540 million up to launch. In addition, Targacept will be entitled to receive royalties on worldwide product sales and further milestone payments linked to worldwide product sales. As detailed in Note 9 to the Financial Statements from page 158, the carrying value of the intangible asset in relation to TC-5214, was impaired by $150 million in 2011 based on the results of the first two of four Phase III efficacy and tolerability studies of the compound.
The Group determines the above externalisation transactions to be significant using a range of factors. We look at the specific circumstances of the individual externalisation arrangement and apply several quantitative and qualitative criteria. Because we consider our externalisation strategy to be an extension of our R&D strategy, the expected total value of development payments under the transaction and its proportion of our annual R&D spend, both of which are proxies for overall research and development effort and cost, are important elements of the significance determination. Other quantitative criteria we apply include, without limitation, expected levels of future sales, the possible value of milestone payments and the resources used for commercialisation activities (for example, the number of staff). Qualitative factors we consider include, without limitation, new market developments, new territories, new areas of research and strategic implications.
In aggregate, milestones capitalised under the Group's other externalisation arrangements totalled $123 million in 2011, $337 million in 2010 and $306 million in 2009, and the Group recognised other income in respect of other externalisation arrangements totalling $18 million in 2011, $82 million in 2010 and $440 million in 2009.
Capitalisation and shareholder return
Dividend for 2011
|
|
$ |
Pence |
SEK |
Payment date |
|
First interim dividend |
0.85 |
51.9 |
5.33 |
12 September 2011 |
|
Second interim dividend |
1.95 |
123.6 |
13.21 |
19 March 2012 |
|
Total |
2.80 |
175.5 |
18.54 |
|
Summary of shareholder distributions
|
|
Shares repurchased (million) |
Cost $m |
Dividend per share $ |
Dividend cost $m |
Shareholder distributions $m |
|
2000 |
9.4 |
352 |
0.70 |
1,236 |
1,588 |
|
2001 |
23.5 |
1,080 |
0.70 |
1,225 |
2,305 |
|
2002 |
28.3 |
1,190 |
0.70 |
1,206 |
2,396 |
|
2003 |
27.2 |
1,154 |
0.795 |
1,350 |
2,504 |
|
2004 |
50.1 |
2,212 |
0.94 |
1,555 |
3,767 |
|
2005 |
67.7 |
3,001 |
1.30 |
2,068 |
5,069 |
|
2006 |
72.2 |
4,147 |
1.72 |
2,649 |
6,796 |
|
2007 |
79.9 |
4,170 |
1.87 |
2,740 |
6,910 |
|
2008 |
13.6 |
610 |
2.05 |
2,971 |
3,581 |
|
2009 |
- |
- |
2.30 |
3,339 |
3,339 |
|
2010 |
53.7 |
2,604 |
2.55 |
3,604 |
6,208 |
|
2011 |
127.4 |
6,015 |
2.80 |
3,6781 |
9,693 |
|
Total |
553.0 |
26,535 |
18.425 |
27,621 |
54,156 |
1 Total dividend cost estimated based upon number of shares in issue at 31 December 2011.
Capitalisation
The total number of shares in issue at 31 December 2011 was 1,292 million. 10.7 million shares were issued in consideration of share option exercises for a total of $409 million. Share repurchases amounted to 127.4 million Ordinary Shares at a cost of $6,015 million. Shareholders' equity increased by a net $33 million to $23,246 million at the year end. Non-controlling interests increased to $226 million (2010: $197 million).
Dividend and share repurchases
In recognition of the Group's strong balance sheet, sustainable significant cash flow and the Board's confidence in the strategic direction and long-term prospects for the business, the Board has adopted a progressive dividend policy, intending to maintain or grow the dividend each year.
The Board has recommended a 5% increase in the second interim dividend to $1.95 (123.6 pence, 13.21 SEK) to be paid on 19 March 2012. This brings the full year dividend to $2.80 (175.5 pence per share, 18.54 SEK), an increase of 10%.
In 2010, the Group recommenced its share repurchase programme. The Group completed net share repurchases of $5,606 million in 2011 (2010: $2,110 million). The Board has announced that the Group intends to complete net share repurchases in the amount of $4.5 billion during 2012, subject to market conditions and business needs.
In setting the distribution policy and the overall financial strategy, the Board's aim is to continue to strike a balance between the interests of the business, our financial creditors and our shareholders. After providing for business investment, funding the progressive dividend policy and meeting our debt service obligations, the Board will keep under review the opportunity to return cash in excess of these requirements to shareholders through periodic share repurchases.
Future prospects
As described earlier in our Annual Report, the coming years will be challenging for the industry and for AstraZeneca as its revenue base transitions through a period of exclusivity losses and new product launches. AstraZeneca makes high-level planning assumptions for revenue evolution, margins, cash flow and business reinvestment to help guide the management of the business.
AstraZeneca assumes that the global biopharmaceutical industry can grow at least in line with real GDP over the planning horizon. While downward pressures on revenue from government interventions in the marketplace have intensified, AstraZeneca's assessment remains that, as yet, these do not yet constitute a sustained 'step-change' in trend. The assumptions going forward for revenue, margins and cash flow assume no material mergers, acquisitions or disposals. In addition, our plans assume no premature loss of exclusivity for key AstraZeneca products.
It is expected that revenue in 2012 will continue to be affected by government interventions on pricing, and ongoing generic competition, including the anticipated loss of market exclusivity for Seroquel IR and Atacand in global markets, as well as for Crestor in Canada.
Over the last several years, the Group has undertaken significant restructuring initiatives aimed at reshaping the cost base to improve long-term competitiveness. The second phase of restructuring, which was announced in January 2010, comprised a significant change programme in R&D as well as additional productivity improvement initiatives in the supply chain and SG&A. The first two phases of the restructuring programme are now largely complete at a cumulative cost of $4.6 billion. This programme will deliver annual benefits to the Group by 2014. In February 2012, the Group announced the next phase of restructuring. Further details are set out in the Our strategic priorities to 2014 section from page 21.
A planning assumption remains that continued productivity improvements (including successful completion of restructuring initiatives), will aid the achievement of levels of revenue and margins to generate the requisite operating cash flow over the planning period to support the reinvestment needs of the business, debt service obligations and shareholder distributions.
APPENDIX B
Principal risks and uncertainties
The pharmaceutical sector is inherently risky and a variety of risks and uncertainties may affect our business. Below we describe the principal risks and uncertainties which we consider to be material to our business in that they may have a significant effect on our financial condition, results of operations and/or reputation.
These risks are not listed in any particular order of priority. Other risks, unknown or not currently considered material, could have a similar effect. We believe that the forward-looking statements about AstraZeneca in our Annual Report and as extracted here, identified by words such as 'anticipates', 'believes', 'expects' and 'intends', are based on reasonable assumptions. However, forward-looking statements involve inherent risks and uncertainties such as those summarised below. They relate to events that may occur in the future, that may be influenced by factors beyond our control and that may have actual outcomes materially different from our expectations.
Product pipeline risks
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Failure to meet development targets |
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The development of any pharmaceutical product candidate is a complex, risky and lengthy process involving significant financial, R&D and other resources, which may fail at any stage of the process due to a number of factors. These include: failure to obtain the required regulatory or marketing approvals for the product candidate or its manufacturing facilities; unfavourable clinical efficacy data; safety concerns; failure of R&D to develop new product candidates; and failure to demonstrate adequate cost effective benefits to regulators and the emergence of competing products. Production and release schedules for biologics may be more significantly impacted by regulatory processes than other products. This is due to more complex and stringent regulation on the manufacturing of biologics and their supply chain. |
A succession of negative drug project results and a failure to reduce development timelines effectively or produce new products that achieve commercial success could adversely affect the reputation of our R&D capabilities and is likely to materially adversely affect our financial condition and results of operations. |
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Difficulties of obtaining and maintaining regulatory approvals for new products |
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We are subject to strict controls on the commercialisation processes for our pharmaceutical products, including in their development, manufacture, distribution and marketing. The requirements to obtain regulatory approval based on a product's safety, efficacy and quality before it can be marketed for an indication in a particular country, as well as to maintain and comply with licences and other regulations relating to its manufacture and marketing, are particularly important. The submission of an application to regulatory authorities (which vary, with different requirements, in each region or country) may or may not lead to the grant of marketing approval. Regulators can refuse to grant approval or may require additional data before approval is given, even though the medicine may already be launched in other countries. The approval of a product is required by the relevant regulatory authority in each country, although a single pan-EU MAA can be obtained through a centralised procedure. In recent years, companies sponsoring new drug applications and regulatory authorities have been under increased public pressure to apply more conservative benefit/risk criteria. In some instances, regulatory authorities require a company to develop plans to ensure safe use of a marketed product before a pharmaceutical product is approved, or after approval, if a new and significant safety issue is established. In addition, third party interpretation of publicly available data on our marketed products has the potential to influence the approval status or labelling of a currently approved and marketed product. |
The predictability of the outcome and timing of review processes remains challenging, particularly in the US, due to competing regulatory priorities and a continuing sentiment of risk aversion on the part of regulatory reviewers and management. Delays in regulatory reviews and approvals could impact the timing of a new product launch. In addition, the drive for public transparency of the review processes through the more extensive use of public advisory committees increases the unpredictability of the process. For example, in the US, the approval date for Brilinta was delayed in December 2010 by the issuance of a Complete Response Letter by the FDA requesting further data and analysis, which led to the product ultimately receiving US approval in the third quarter of 2011. |
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Failure to obtain and enforce effective IP protection |
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Our ability to obtain and enforce patents and other IP rights in relation to our products is an important element of our ability to protect our investment in R&D and create long-term value for the business. A number of the countries in which we operate are still developing their IP laws or may even be limiting the applicability of these laws to pharmaceutical inventions. Adverse political perspectives on the desirability of strong IP protection for pharmaceuticals in certain emerging and even developed markets may limit the scope for us to obtain effective IP protection for our products. As a result, certain countries may seek to limit or deny effective IP protection for pharmaceuticals. |
Limitations on the availability of patent protection or the use of compulsory licensing in certain countries in which we operate could have a material adverse effect on the pricing and sales of our products and, consequently, could materially adversely affect our revenues from those products. More information about protecting our IP is contained in the Intellectual Property section from page 34. Information about the risk of patent litigation and the early loss of IP rights is contained in the Expiry or loss of, or limitations on, IP rights section on page 132. |
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Delay to new product launches |
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Our continued success depends on the development and successful launch of innovative new drugs. The anticipated launch dates of major new products have a significant impact on a number of areas of our business, including investment in large clinical studies, the manufacture of pre-launch product stocks, investment in marketing materials pre-launch, sales force training and the timing of anticipated future revenue streams from new product sales. These launch dates are primarily driven by the development programmes that we run and the demands of the regulatory authorities in the approvals process, as well as pricing negotiations. Delays to anticipated launch dates can result from a number of factors including adverse findings in preclinical or clinical studies, regulatory demands, competitor activity and technology transfer. |
Significant delays to anticipated launch dates of new products could have a material adverse effect on our financial condition and results of operations. For example, for the launch of products that are seasonal in nature, delays in regulatory approvals or manufacturing difficulties may delay launch to the next season which, in turn, may significantly reduce the return on costs incurred in preparing for the launch for that season. In addition, a delay in the launch may lead to increased costs if, for example, marketing and sales efforts need to be rescheduled or protracted for longer than expected. |
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Strategic alliances and acquisitions may be unsuccessful |
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We seek technology licensing arrangements and strategic collaborations to expand our product portfolio and geographical presence as part of our business strategy. Such licensing arrangements and strategic collaborations are key, enabling us to grow and strengthen the business. The success of such arrangements is largely dependent on the technology and other IP we acquire and the resources, efforts and skills of our partners. Also, under many of our strategic alliances, we make milestone payments well in advance of the commercialisation of the products, with no assurance that we will recoup these payments. Furthermore, we experience strong competition from other pharmaceutical companies in respect of licensing arrangements and strategic collaborations, and therefore may be unsuccessful in establishing some of our intended projects. We may also seek to acquire complementary businesses as part of our business strategy. The integration of an acquired business could involve incurring significant debt and unknown or contingent liabilities, as well as having a negative effect on our reported results of operations from acquisition related charges, amortisation of expenses related to intangibles and charges for the implementation of long-term assets. We may also experience difficulties in integrating geographically separated organisations, systems and facilities, and personnel with different organisational cultures. |
If we fail to complete these types of collaborative projects in a timely manner, on a cost effective basis, or at all, this may limit our ability to access a greater portfolio of products, IP, technology and shared expertise. Additionally, disputes or difficulties in our relationship with our collaborators or partners may arise, often due to conflicting priorities or conflicts of interest between parties, which may erode or eliminate the benefits of these alliances. The incurrence of significant debt or liabilities as a result of integration of an acquired business could cause deterioration in our credit rating and result in increased borrowing costs and interest expense. Further, if, following an acquisition, liabilities are uncovered in the acquired business, the Group may suffer losses and may not have remedies against the seller or third parties. The integration process may also result in business disruption, diversion of management resources, the loss of key employees, and other issues such as a failure to integrate IT and other systems. |
Commercialisation and business execution risks
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Challenges to achieving commercial success of new products |
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The successful launch of a new pharmaceutical product involves substantial investment in sales and marketing activities, launch stocks and other items. The commercial success of our new medicines is of particular importance to us in order to replace lost sales following patent expiry. We may ultimately be unable to achieve commercial success for any number of reasons. These include difficulties in manufacturing sufficient quantities of the product candidate for development or commercialisation in a timely manner, erosion of IP rights including infringement by third parties and failure to show a differentiated product profile. As a result, we cannot be certain that compounds currently under development will achieve success, and our ability to accurately assess, prior to launch, the eventual efficacy or safety of a new product once in broader clinical use can only be based on data available at that time, which is inherently limited due to relatively short periods of product testing and small clinical study patient samples. Additionally, the commercialisation of biologics is often more complex than for traditional pharmaceutical products, primarily due to differences in the mode of administration, technical aspects of the product and rapidly changing distribution and reimbursement environments. |
If a new product does not succeed as anticipated or its rate of sales growth is slower than anticipated, there is a risk that we are unable to fully recoup the costs incurred in launching it, which could materially adversely affect our financial condition and results of operations. Due to the complexity of the commercialisation process for biologics, the methods of distributing and marketing biologics could materially adversely impact our revenues from the sales of products such as Synagis and FluMist/Fluenz. |
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Illegal trade in our products |
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Illegal trade covers the theft, illegal diversion and counterfeiting of our products. Illegal trade in pharmaceutical products is estimated to exceed $75 billion per year and is generally considered by the industry, NGOs and governmental authorities to be increasing. We suffer a commensurate financial exposure to illegal trade, but in many cases, due to the nature of our portfolio, this exposure has a greater impact on public health. Regulators and the public expect us to secure the integrity of our supply chain and to actively cooperate in the reduction of illegal trade in genuine AstraZeneca products, whether illegally diverted or stolen, and in counterfeited products. |
Public loss of confidence in the integrity of pharmaceutical products as a result of counterfeiting could materially adversely affect our reputation and financial performance. In addition, undue or misplaced concern about the issue may induce some patients to stop taking their medicines, with consequential risks to their health. There is also a direct financial loss where counterfeit medicines replace sales of genuine products and where genuine products are recalled following discovery of counterfeit, stolen and/or illegally traded products in an effort to regain control of the integrity of the supply chain. In many countries, particularly developing markets, a robust programme to tackle illegal trade is seen as part of the licence to operate. |
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Developing our business in Emerging Markets |
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The development of our business in Emerging Markets is a critical factor in determining our future ability to sustain or increase our global product revenues. This poses various challenges including: more volatile economic conditions; competition from companies with existing market presence; the need to identify correctly and to leverage appropriate opportunities for sales and marketing; poor IP protection; inadequate protection against crime (including counterfeiting, corruption and fraud); the need to impose developed market compliance standards; inadvertent breaches of local and international law; not being able to recruit appropriately skilled and experienced personnel; identification of the most effective sales channels and route to market; and interventions by national governments or regulators restricting access to market and/or introducing adverse price controls. |
The failure to exploit potential opportunities appropriately in Emerging Markets may materially adversely affect our reputation, financial condition and results of operations. |
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Expiry or loss of, or limitations on, IP rights |
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Pharmaceutical products are only protected from being copied during the limited period of protection under patent rights and/or related IP rights such as Regulatory Data Protection or Orphan Drug status. Expiry or loss of these rights typically leads to the immediate launch of generic copies of the product in the country where the rights have expired or been lost. See the Intellectual Property section from page 34 which contains a table of certain patent expiry dates for our key marketed products. Additionally, the expiry or loss of patents covering other innovator companies' products may also lead to increased competition for our own, still-patented, products in the same product class due to the availability of generic products in that product class. |
Products under patent protection or within the period of Regulatory Data Protection typically generate significantly higher revenues than those not protected by such rights. Our revenues, financial condition and results of operations may be materially adversely affected upon expiry or early loss of our IP rights, due to generic entrants into the market for the applicable product. Additionally, the loss of patent rights covering major products of other pharmaceutical companies, such as Lipitor™ (in November), may adversely affect the growth of our still-patented products in the same product class (ie Crestor) in that market. |
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Pressures resulting from generic competition |
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Our products compete not only with other products approved for the same condition, marketed by research-based pharmaceutical companies but also with generic drugs marketed by generic pharmaceutical manufacturers. These competitors may invest more of their resources into the marketing of their products than we do depending on the relative priority of these competitor products within their company's portfolio. Generic versions of products are often sold at lower prices than branded products as the manufacturer does not have to recoup the significant cost of R&D investment and market development. All our patented products, including Nexium, Crestor and Seroquel are subject to price pressures as a result of competition from generic copies of these products and from generic forms of other drugs in the same product class. As well as facing generic competition upon expiry or loss of IP rights, we also face the risk that generic drug manufacturers seek to market generic versions of our products prior to expiries of our patents and/or the Regulatory Exclusivity periods. For example, we are currently facing challenges in the US from numerous generic drug manufacturers regarding our patents for Seroquel XR, Nexium and Crestor, three of our best selling products. Generic manufacturers may also take advantage of the failure of certain countries to properly enforce Regulatory Data Protection and may launch generics during this protected period. This is a particular risk in some Emerging Markets where appropriate patent protection may be difficult to obtain or enforce. |
If challenges to our patents by generic drug manufacturers succeed and generic products are launched, or generic products are launched 'at risk' on the expectation that challenges to our IP will be successful, this may materially adversely affect our financial condition and results of operations. In 2011, US sales for Seroquel XR, Nexium and Crestor were $779 million, $2,397 million, and $3,074 million respectively. Furthermore, if limitations on the availability, scope or enforceability of patent protection are implemented in jurisdictions in which we operate, generic manufacturers in these countries may be increasingly able to introduce competing products to the market earlier than they would have been able to, had more robust patent or Regulatory Data Protection been available. |
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Effects of patent litigation in respect of IP rights |
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Any of the IP rights protecting our products may be asserted or challenged in IP litigation initiated against or by alleged infringers. Such IP rights may be affected by validity challenges in patent offices. Regardless, we expect our most valuable products to receive the greater number of challenges. Despite our efforts to establish and defend robust patent protection for our products, we may not succeed in protecting our patents from such litigation or other challenges. We also bear the risk that we may be found to infringe patents owned or licensed exclusively by third parties, including research-based and generic pharmaceutical companies and individuals. Infringement accusations may implicate, for example, our manufacturing processes, product intermediates or use of research tools. Details of significant infringement claims against us by third parties enforcing IP rights can be found in Note 25 to the Financial Statements from page 181. |
If we are not successful in maintaining exclusive rights to market one or more of our major products, particularly in the US where we achieve our highest revenue, our revenue and margins could be materially adversely affected. Managing or litigating infringement disputes over so-called 'freedom to operate' can be costly. We may be subject to injunctions against our products or processes and be liable for damages or royalties. We may need to obtain costly licences. These risks may be greater in respect of biologics and vaccines, where patent infringement claims may relate to research tools, methods and biological materials. While we seek to manage such risks by, for example, acquiring licences, foregoing certain activities or uses, or modifying processes to avoid infringement claims and permit commercialisation of our products, such steps entail significant cost and there is no guarantee that they will be successful. |
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Price controls and reductions |
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Most of our key markets have experienced the implementation of various cost control or reimbursement mechanisms in respect of pharmaceutical products. For example, in the US, realised prices are being depressed through cost-control tools such as restricted lists and formularies, which employ 'generic first' strategies and require physicians to obtain prior approval for the use of a branded medicine where a generic version exists. These mechanisms put pressure on manufacturers to reduce prices and to limit access to branded products. Many of these mechanisms shift a greater proportion of the cost of medicines to the individual via out-of-pocket payments at the pharmacy counter. The patient out-of-pocket spend is generally in the form of a co-payment or, in some cases, a co-insurance, which is designed, principally, to encourage patients to use generic medicines. Concurrently, many markets are adopting the use of Health Technology Assessment (HTA) to provide a rigorous evaluation of the clinical efficacy of a product, at or post launch. HTA evaluations are also increasingly being used to assess the clinical as well as the cost effectiveness of products in a particular health system. This comes as payers and policy makers attempt to drive increased efficiencies in the use and choice of pharmaceutical products. A summary of the principal aspects of price regulation and how price pressures are affecting our business in our most important markets is set out in the Geographical Review from page 77 and these economic pressures are also further discussed below in the following risk factor. |
Due to these pressures on the pricing of our products, there can be no certainty that we will be able to charge prices for a product that, in a particular country or in the aggregate, enable us to earn an adequate return on our product investment. These pressures, including the increasingly restrictive reimbursement policies to which we are subject and the potential adoption of new legislation expanding the scope of permitted commercial importation of medicines into the US, could materially adversely affect our financial condition and results of operations. We expect that these pressures on pricing will continue, and there can be no assurance that they will not increase. |
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Economic, regulatory and political pressures |
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We face continued economic, regulatory and political pressures to limit or reduce the cost of our products. In 2010, the US passed the Affordable Care Act, a comprehensive health reform package with provisions taking effect between 2010 and 2014. The law expands insurance coverage, establishes new national entities focused on health system reforms and calls on the pharmaceutical industry and other healthcare industries to offset spending increases through 'pay-fors'. In terms of specific provisions impacting our industry, the law mandates higher rebates and discounts on branded drugs for certain Medicare and Medicaid patients as well as an industry-wide excise tax. The law also includes several health system delivery reforms that will be implemented over the next three years, including the establishment of a new comparative effectiveness research organisation, the Patient-Centered Outcomes Research Institute and an Independent Payment Advisory Board with broad authority to propose to cut Medicare expenditures. The health reform legislation expands the patient population eligible for Medicaid and provides new insurance coverage for individuals through state-operated health insurance exchanges. Large employers have typically offered generous health insurance benefits, but many are struggling with increasing health insurance premiums and may therefore opt to shift employee coverage into the health insurance exchanges, which will be operational by 2014. The pharmaceutical industry could be adversely impacted by such shifts if the health insurance exchanges do not offer a prescription drug benefit that is as robust as benefits historically provided by large employers. In the EU, efforts by the European Commission to reduce inconsistencies and to improve standards in the disparate national regulatory systems have met with little immediate success. The industry continues to be exposed in Europe to a range of disparate pricing systems, ad hoc cost-containment measures and reference pricing mechanisms, which impact prices. Further information regarding these pressures is contained in the Regulatory requirements and Pricing pressure sections from page 17. |
It is not possible to accurately estimate the financial impact of the potential consequences resulting from the Affordable Care Act or related legislative changes when taken together with the number of other market and industry related factors that can also result in similar impacts. While the overall reduction in our profit before tax for the year due to higher minimum Medicaid rebates on prescription drugs, discounts on branded pharmaceutical sales to Medicare Part D beneficiaries and an industry-wide excise fee was $750 million, this reflects only the limited number of known, quantifiable and isolatable effects of these legislative developments. Other potential indirect or associated consequences of these legislative developments, which continue to evolve and which cannot be estimated could have similar impacts. These include broader changes in access to, or eligibility for, coverage under Medicare, Medicaid or similar governmental programmes, such as the recent proposals to limit Medicare benefits, which could indirectly impact our pricing or sales of prescription products within the private sector. These continued disparities in pricing systems could lead to marked price differentials between markets, which increase the pricing pressure affecting the industry. The importation of pharmaceutical products from countries where prices are low due to government price controls or other market dynamics, to countries where prices for those products are higher, is already prevalent and may increase. In particular, as discussed in the Pricing pressure section on page 18, Germany, Spain, Portugal and Greece have all introduced a number of short-term measures to lower healthcare spending, including price cuts or increased mandatory rebates, which could have a material adverse effect on our financial condition and results of operations. |
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Biosimilars |
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Various regulatory authorities are implementing or considering abbreviated approval processes for biosimilars (similar versions of existing biologics, also referred to as 'similar biological medicinal products', 'follow-on biologics' and 'follow-on protein products') that would compete with patented biologics. For example, in 2010, the US enacted the Biologics Price Competition and Innovation Act within the Affordable Care Act, which contains general directives for biosimilar applications. The FDA sought stakeholder input on specific issues and challenges in implementing an abbreviated biosimilar approval pathway and further guidance is expected to be issued in the first quarter of 2012. In addition, the FDA and the industry have reached agreement on biosimilar user fees. In Europe, the EMA published a draft guideline on similar biological medicinal products containing MAbs. This draft guideline will likely be finalised in 2012 and is expected to include more clarification around the definition of biosimilars. |
While it is uncertain when any such abbreviated approval processes may be fully adopted, particularly for more complex protein molecules such as MAbs, any such processes could materially adversely affect the future commercial prospects for patented biologics, such as the ones that we produce. |
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Increasing implementation and enforcement of more stringent anti-bribery and anti-corruption legislation |
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There is an increasing focus globally on the implementation and enforcement of anti-bribery and anti-corruption legislation. For example, the UK Bribery Act came into force in July. This act has extensive extra-territorial application, implements significant changes to existing UK anti-bribery legislation and broadens the scope of statutory offences and the potential applicable penalties, including, organisational liability for any bribe paid by persons or entities associated with an organisation where the organisation failed to have adequate preventative procedures in place at the time of the offence. There is also an increase in the maximum applicable penalties for bribery, including up to 10 years imprisonment and unlimited fines. There have also been increased enforcement efforts in the UK by the Serious Fraud Office and, in the US, there has been significant enforcement activity in respect of the Foreign Corrupt Practices Act by the SEC and US Department of Justice against US companies and non-US companies listed in the US. We are the subject of current anti-corruption investigations and there can be no assurance that we will not, from time to time, continue to be subject to informal inquiries and formal investigations from governmental agencies. In the context of our business, governmental officials interact with us in a variety of roles that are important to our operations, such as in the capacity of a regulator, partner or healthcare payer, reimburser or prescriber, among others. |
We devote significant resources to the considerable challenge of compliance with this legislation, including in emerging and developing markets, at considerable cost. Investigations from governmental agencies require additional resources. Despite taking significant measures to prevent breaches of applicable anti-bribery and anti-corruption laws by our personnel, breaches may result in the imposition of significant penalties, such as fines, the requirement to comply with monitoring or self-reporting obligations or debarment or exclusion from government sales or reimbursement programmes, any of which could materially adversely affect our financial condition and results of operations and reputation. |
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Any expected gains from productivity initiatives are uncertain |
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We continue to implement various productivity initiatives and restructuring programmes with the aim of enhancing the long-term efficiency of the business. However, anticipated cost savings and other benefits from these programmes are based on estimates and the actual savings may vary significantly. In particular, these cost reduction measures are based on current conditions and do not take into account any future changes to the pharmaceutical industry or our operations, including new business developments, wage or price increases. |
If inappropriately managed, the expected value of these initiatives could be lost through low employee engagement and reduced productivity, increased absence and attrition levels, and industrial action. Our failure to successfully implement these planned cost reduction measures, either through the successful conclusion of employee relations processes (including consultation, engagement, talent management, recruitment and retention), or the possibility that these efforts do not generate the level of cost savings we anticipate, could materially adversely affect our results of operations and financial condition. |
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Failure of information technology |
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We are dependent on effective IT systems. These systems support key business functions such as our R&D, manufacturing and sales capabilities, and are an important means of internal and external communication. |
Any significant disruption of these IT systems or failure to integrate new and existing IT systems could materially adversely affect our financial condition and results of operations. |
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Failure of outsourcing |
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We have outsourced a number of business critical operations to third party providers. This includes certain R&D processes, IS/IT systems, human resources, finance and accounting services. In 2011, we terminated our existing outsource relationship for IT infrastructure services and transitioned to a new multi-sourced operating model. This includes bringing critical strategic and control activities back into AstraZeneca. |
Failure of the outsource provider to deliver timely services and to the required level of quality could materially adversely affect our financial condition and results of operations and adversely impact our ability to meet business targets and maintain a good reputation within the industry and with stakeholders. It may also result in non-compliance with applicable laws and regulations. A failure to successfully manage and effect the transfer of the provision of the IT infrastructure services in-house and to the new outsourcing providers could create disruption which could materially adversely affect our financial condition and results of operations. |
Supply chain and delivery risks
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Manufacturing biologics |
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Manufacturing biologics, especially in large quantities, is complex and may require the use of innovative technologies to handle living micro-organisms and facilities specifically designed and validated for this purpose, with sophisticated quality assurance and control procedures. |
Slight deviations in any part of the manufacturing process may result in lot failure, product recalls or spoilage, for example due to contamination. |
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Reliance on third parties for goods |
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We increasingly rely on third parties for the timely supply of goods, such as specified raw materials (for example, the active pharmaceutical ingredient in some of our medicines), equipment, formulated drugs and packaging, all of which are key to our operations. Unexpected events and/or events beyond our control could result in the failure of the supply of goods. For example, suppliers of key goods we rely on may cease to trade. In addition, we may have limited supply of biological materials, such as cells, animal products or by-products. Furthermore, government regulations in multiple jurisdictions could result in restricted access to, use or transport of, such materials. |
Third party supply failure could materially adversely affect our financial condition and results of operations. This may lead to significant delays and/or difficulties in obtaining goods and services on commercially acceptable terms. Loss of access to sufficient sources of such materials may interrupt or prevent our research activities as planned and/or increase our costs. Further information is contained in the Managing sourcing risk section on page 39. |
Legal, regulatory and compliance risks
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Adverse outcome of litigation and/or governmental investigations |
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We may be subject to legal proceedings and governmental investigations. Litigation, particularly in the US, is inherently unpredictable and unexpectedly high awards for damages can result from an adverse verdict. In many cases, plaintiffs may claim compensatory, punitive and statutory damages in extremely high amounts. In particular, the marketing, promotional, clinical and pricing practices of pharmaceutical manufacturers, as well as the manner in which manufacturers interact with purchasers, prescribers, and patients, are subject to extensive regulation, litigation and governmental investigation. Many companies, including AstraZeneca, have been subject to claims related to these practices asserted by federal and state governmental authorities and private payers and consumers which have resulted in substantial expense and other significant consequences. Note 25 to the Financial Statements from page 181 describes the material legal proceedings in which we are currently involved. |
Investigations or legal proceedings, regardless of their outcome, could be costly, divert management attention, or damage our reputation and demand for our products. Unfavourable resolution of current and similar future proceedings against us could subject us to criminal liability, fines, penalties or other monetary or non-monetary remedies; require us to make significant provisions in our accounts relating to legal proceedings; and could materially adversely affect our financial condition and results of operations. |
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Substantial product liability claims |
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Pharmaceutical companies have, historically, been subject to large product liability damages claims, settlements and awards for injuries allegedly caused by the use of their products. Adverse publicity relating to the safety of a product or of other competing products may increase the risk of product liability claims. |
Substantial product liability claims that result in court decisions against us or in the settlement of proceedings could materially adversely affect our financial condition and results of operations, particularly where such circumstances are not covered by insurance. Further details of our Seroquel product liability litigation are set out in Note 25 to the Financial Statements from page 181. |
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Failure to adhere to applicable laws, rules and regulations |
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Any failure to comply with applicable laws, rules and regulations may result in civil and/or criminal legal proceedings being filed against us, or in us becoming subject to regulatory sanctions. Regulatory authorities have wide-ranging administrative powers to deal with any failure to comply with continuing regulatory oversight (and this could affect us, whether such failure is our own or that of our third party contractors). |
This could materially adversely affect the conduct of our business. For example, once a product has been approved for marketing by regulatory authorities, it is subject to continuing control and regulation, such as the manner of its manufacture, distribution, marketing and safety surveillance. In addition, any amendments that are made to the manufacturing, distribution, marketing and safety surveillance processes of our products may require additional regulatory approvals, which could result in significant additional costs and/or disruption to these processes. Such amendments may be imposed on us as a result of the continuing inspections to which we are subject or may be made at our discretion. It is possible, for example, that regulatory issues concerning compliance with current Good Manufacturing Practice or safety monitoring regulations for pharmaceutical products (often referred to as pharmacovigilance) could arise and lead to loss of product licences, product recalls and seizures, interruption of production leading to product shortages and delays in new product approvals pending resolution of the issues. |
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Environmental/occupational health and safety liabilities |
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We have environmental and/or occupational health and safety related liabilities at some currently or formerly owned, leased and third party sites, the most significant of which are detailed in Note 25 to the Financial Statements from page 181. |
While we carefully manage these liabilities, if a significant non-compliance issue, environmental, occupational health or safety incident for which we are responsible were to arise, this could result in us being liable to pay compensation, fines or remediation costs. In some circumstances, such liability could materially adversely affect our financial condition and results of operations. In addition, our financial provisions for any obligations that we may have relating to environmental or occupational health and safety liabilities may be insufficient if the assumptions underlying the provisions, including our assumptions regarding the portion of waste at a site for which we are responsible, prove incorrect or if we are held responsible for additional contamination or occupational health and safety related claims. |
Economic and financial risks
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Adverse impact of a sustained economic downturn |
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A variety of significant risks may arise from a sustained global economic downturn. Additional pressure from governments and other healthcare payers on medicine prices and volumes of sales in response to recessionary pressures on budgets may cause a slowdown or a decline in growth in some markets. In some cases, those governments most severely impacted by the economic downturn may seek alternative ways to settle their debts through, for example, the issuance of government bonds which might trade at a discount to the value of the debt. In addition, our customers may cease to trade, which may result in losses from writing off debts. We are highly dependent on being able to access a sustainable flow of liquid funds due to the high fixed costs of operating our business and the long and uncertain development cycles of our products. In a sustained economic downturn, financial institutions with whom we deal may cease to trade and there can be no guarantee that we will be able to access monies owed to us without a protracted, expensive and uncertain process, if at all. Our cash investments are managed centrally and more than 95% of deposits are invested directly in short-term, liquid US dollar funds and US Treasury Bills. Therefore, our major credit exposure is US sovereign default risk. |
While we have adopted cash management and treasury policies to manage this risk (see Financial risk management policies section on page 93), we cannot be certain that these will be completely effective in particular in the event of a global liquidity crisis. In addition, open positions where we are owed money and deposits with financial institutions cannot be guaranteed to be recoverable. Additionally, if we need access to external sources of financing to sustain and/or grow our business, such as the debt or equity capital financial markets, this may not be available on commercially acceptable terms, if at all, in the event of a severe and/or sustained economic downturn. This may, for instance, be the case in the event of any default by the Group on its debt obligations, which may materially adversely affect our ability to secure debt funding in the future or generally on our financial condition. Further information on debt-funding arrangements is contained in the Financial risk management policies section on page 93. |
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Impact of fluctuations in exchange rates |
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As a global business, currency fluctuations can significantly affect our results of operations, which are reported in US dollars. Approximately 40% of our global 2011 sales were in the US, which is expected to remain our largest single market for the foreseeable future. Sales in other countries are predominantly in currencies other than the US dollar, including the euro, Japanese yen, Australian dollar and Canadian dollar. We have a growing exposure to emerging market currencies, where some have exchange controls in place, but for others the exchange rates are also linked to the US dollar. Major components of our cost base are located in the UK and Sweden, where an aggregate of approximately 26.7% of our employees are based. |
Movements in the exchange rates used to translate foreign currencies into US dollars may materially adversely affect our financial condition and results of operations. Additionally, some of our subsidiaries import and export goods and services in currencies other than their own functional currency and so the results of such subsidiaries could be affected by currency fluctuations arising between the transaction dates and the settlement dates for these transactions. See Note 23 to the Financial Statements from page 171. |
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Limited third party insurance coverage |
Impact |
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Recent insurance loss experience in our industry, including product liability exposures, has increased the cost of, and narrowed the coverage afforded by, pharmaceutical companies' product liability insurance. To contain insurance costs in recent years, we have continued to adjust our coverage profile, accepting a greater degree of uninsured exposure. The Group has not held product liability insurance since February 2006. In addition, where claims are made under insurance policies, insurers may reserve the right to deny coverage on various grounds. |
If such denial of coverage is ultimately upheld, this could result in material additional charges to our earnings. An example of a dispute with insurers relating to the availability of insurance coverage and in relation to which costs incurred by the Group may not ultimately be recovered through such coverage is included in Note 25 to the Financial Statements in the Seroquel product liability section on page 187. |
|
Taxation |
Impact |
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The integrated nature of our worldwide operations can produce conflicting claims from revenue authorities as to the profits to be taxed in individual territories. The majority of the jurisdictions in which we operate have double tax treaties with other foreign jurisdictions, which enable us to ensure that our revenues and capital gains do not incur a double tax charge. |
The resolution of these disputes can result in a reallocation of profits between jurisdictions and an increase or decrease in related tax costs, and has the potential to affect our cash flows and EPS. Claims, regardless of their merits or their outcome, are costly, divert management attention and may adversely affect our reputation. If any of these double tax treaties should be withdrawn or amended, especially in a territory where a member of the Group is involved in a taxation dispute with a tax authority in relation to cross-border transactions, such withdrawal or amendment could materially adversely affect our financial condition and results of operations, as could a negative outcome of a tax dispute or a failure by the tax authorities to agree through competent authority proceedings. See the Financial risk management policies section on page 93 for tax risk management policies and Note 25 to the Financial Statements on page 189 for details of current tax disputes. |
|
Pensions |
Impact |
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Our pension obligations are backed by assets invested across the broad investment market. Our most significant obligations relate to the UK pension fund. |
Sustained falls in these asset values will put a strain on funding which may result in requirements for additional cash, restricting cash available for strategic business growth. Similarly, if the liabilities rise as a result of a sustained low interest rate environment, there will be a strain on funding from the business. The likely increase in the IAS 19 accounting deficit generated by any of these factors may cause the ratings agencies to review our credit rating, with the potential to negatively affect our ability to raise debt. See Note 18 to the Financial Statements from page 165 for further details of the Group's pension obligations. |
APPENDIX C
This statement relates to and is extracted from the Annual Report. It is repeated here solely for the purpose of complying with rule 6.3.5 of the Disclosure and Transparency Rules. It is not connected to the information presented in this announcement or in the Company's fourth quarter and full year results 2011 announcement that was published on 2 February 2012.
Directors' responsibility statement pursuant to DTR 4
The Directors confirm that to the best of our knowledge:
· The Financial Statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole.
· The Directors' Report includes a fair review of the development and performance of the business and the position of the issuer and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.
On behalf of the Board of Directors on 2 February 2012
David R Brennan
Director
APPENDIX D
Related party transactions
During the period 1 January 2012 to 2 February 2012, there were no transactions, loans, or proposed transactions between the Company and any related parties which were material to either the Company or the related party, or which were unusual in their nature or conditions (see also Note 27 to the Financial Statements on page 190).
ADDITIONAL INFORMATION
Trade marks
Trade marks of the AstraZeneca group of companies appear throughout our Annual Report and are extracted here in italics. AstraZeneca, the AstraZeneca logotype and the AstraZeneca symbol are all trade marks of the AstraZeneca group of companies. Trade marks of companies other than AstraZeneca appear with a ™ sign and include: Abraxane™, a trade mark of Abraxis BioScience, LLC.; Cubicin™, a trade mark of Cubist Pharmaceuticals, Inc.; CytoFab™, a trade mark of Protherics Inc.; Kombiglyze XR™ and KomboglyzeTM, trade marks of Bristol-Myers Squibb Company; Lipitor™, a trade mark of Pfizer Ireland Pharmaceuticals; Onglyza™, a trade mark of Bristol-Myers Squibb Company; RanmarkTM, a trade mark of Daiichi Sankyo Company Limited; and Teflaro™, a trade mark of Forest Laboratories, Inc.
Cautionary statement regarding forward-looking statements
The purpose of our Annual Report is to provide information to the members of the Company. The Company and its Directors, employees, agents and advisors do not accept or assume responsibility to any other person to whom our Annual Report is shown or into whose hands it may come and any such responsibility or liability is expressly disclaimed. In order, among other things, to utilise the 'safe harbour' provisions of the US Private Securities Litigation Reform Act of 1995 and the UK Companies Act 2006, we are providing the following cautionary statement: Our Annual Report and this extract from our Annual Report contains certain forward-looking statements with respect to the operations, performance and financial condition of the Group. Forward-looking statements are statements relating to the future which are based on information available at the time such statements are made, including information relating to risks and uncertainties. Although we believe that the forward-looking statements in our Annual Report are based on reasonable assumptions, the matters discussed in the forward-looking statements may be influenced by factors that could cause actual outcomes and results to be materially different from those expressed or implied by these statements. The forward-looking statements reflect knowledge and information
available at the date of the preparation of our Annual Report and the Company undertakes no obligation to update these forward-looking statements. We identify the forward-looking statements by using the words 'anticipates', 'believes', 'expects', 'intends' and similar expressions in such statements. Important factors that could cause actual results to differ materially from those contained in forward-looking statements, certain of which are beyond our control, include, among other things, those factors identified in the Principal risks and uncertainties section from page 130 of our Annual Report. Nothing in our Annual Report or this extract should be construed as a profit forecast.
A C N Kemp
Company Secretary
26 March 2012
- ENDS -
This information is provided by RNS
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