26th Jul 2007 11:00
AstraZeneca PLC26 July 2007 AstraZeneca PLC Second Quarter and Half Year Results 2007 "Solid financial performance in the First Half. Pipeline strengthened with twonew compounds progressing to Phase III development and the addition ofMedImmune." Financial HighlightsGroup 2nd Quarter 2nd Quarter Actual CER Half Year Half Year Actual CER 2007 2006 % % 2007 2006 % % $m $m $m $m Sales 7,273 6,625 +10 +6 14,239 12,805 +11 +8 Operating Profit 1,973 2,131 -7 -11 4,143 4,107 +1 -1 Profit before Tax 1,991 2,209 -10 -14 4,258 4,253 - -2 Earnings per Share $0.95 $1.02 -7 -11 $1.97 $1.92 +3 +1 Adjusted EPS* $1.19 $1.02 +17 +13 $2.25 $1.92 +17 +15(excluding MedImmune& restructuring costs) * Q2 and First Half 2007 Earnings per Share exclude ($0.06) per share impactfrom the MedImmune acquisition (including consolidated trading from 1 June, netinterest expense on deal financing, amortisation of intangibles and one-offcosts associated with the acquisition). Q2 and First Half 2007 Earnings perShare exclude ($0.18) and ($0.22), respectively, in respect of restructuringcharges associated with ongoing and newly initiated productivity improvementprogrammes. All narrative in this section refers to growth rates at constant exchange rates(CER) • Second quarter sales increased 6 percent to $7,273 million. Excluding the MedImmune acquisition and restructuring charges from the second quarter, operating profit increased 11 percent to $2,452 million; Earnings per Share increased 13 percent to $1.19.• In the reported results for the second quarter, MedImmune recorded an operating loss of $103 million. Restructuring charges amounted to $376 million.• Restructuring initiatives have been significantly scaled up to deliver annual benefits in excess of $900 million by 2010, at an estimated cost of $1.6 billion.• Successful completion of MedImmune acquisition; synergies on track.• Combined sales of five key growth products increased 15 percent in the first half: Nexium(TM)(up 4 percent), Seroquel(TM)(up 12 percent), Crestor(TM)(up 47 percent), Arimidex(TM)(up 12 percent) and Symbicort(TM)(up 22 percent). Symbicort(TM)was launched in the US market in June.• Free cash flow before acquisitions was $2,662 million in the first half. Cash distributions to shareholders were $3,910 million, including net share repurchases of $2,032 million.• The Board has recommended a 6 percent increase in the first interim dividend to $0.52.• Two new compounds (dapagliflozin for diabetes and ZD4054 for prostate cancer) progress to Phase III development, bringing the total number of Phase III projects to eight. David Brennan, Chief Executive Officer, said: "A solid underlying financialperformance puts us on track to deliver our full year targets. The first halfsaw excellent progress in strengthening the product pipeline; in addition to twonew compounds progressing into Phase III, the successful acquisition ofMedImmune will have a transformational impact upon AstraZeneca's science base.AstraZeneca is now well positioned to deliver its biologics strategy on agreatly accelerated timeline." London, 26 July 2007 Pictures of senior executives are available on www.newscast.co.uk. Broadcastfootage of AstraZeneca products and activities is available onwww.thenewsmarket.com/astrazeneca. Media Enquiries: Steve Brown/Edel McCaffrey (London) (020) 7304 5033/5034 Staffan Ternby (Sodertalje) (8) 553 26107 Kirsten Evraire (Wilmington) (302) 885 0435Analyst/Investor Mina Blair/Karl Hard (London) (020) 7304 5084/5322Enquiries: Jonathan Hunt (London) (020) 7304 5087 Staffan Ternby (Sodertalje) (8) 553 26107 Ed Seage/Jorgen Winroth (USA) (302) 886 4065/(212) 579 0506 Business Highlights All narrative in this section refers to growth rates atconstant exchange rates (CER) unless otherwise indicated Acquisition of MedImmune, Inc. The acquisition of MedImmune, Inc. was completed in June. As a result,AstraZeneca consolidated financial results include the results of MedImmune witheffect from 1 June 2007. The inclusion of MedImmune increased reported sales inthe second quarter by $24 million, contributed an operating loss of $103 millionand had a negative impact on earnings per share of 6 cents. Included in theoperating loss is intangible amortisation of $35 million and $49 million inone-off costs associated with the acquisition. Incremental interest charges of$37 million on the acquisition financing (net of MedImmune's interest income)are included in the negative EPS impact of 6 cents. Second Quarter Sales in the second quarter increased by 6 percent at CER, or 10 percent on anas reported basis (including a 4 percent positive impact from currencymovements). Sales in the US were up 6 percent. Sales outside the US were alsoup 6 percent, on a strong 21 percent increase in Emerging Markets. Operating profit in the second quarter was $1,973 million. Included in this arerestructuring costs of $199 million associated with the previously announcedglobal supply chain productivity initiative and a further $177 million incharges related to new productivity initiatives. Excluding these restructuringcosts and the MedImmune impact referred to above, the underlying increase inoperating profit was 11 percent. Expenditures on Research and Development were up 20 percent to $1,225 million,including $28 million in relation to MedImmune. Excluding MedImmune and $29million in restructuring costs charged to R&D this quarter, R&D expenseincreased 14 percent. In the second quarter, SG&A expense increased 10 percent to $2,605 million. SG&A expenditures at MedImmune accounted for $120 million, including $35 million ofamortisation of intangible assets arising from the acquisition and one-off costsof $49 million. Excluding MedImmune SG&A and restructuring costs of $148million, underlying SG&A expense was 2 percent lower than the second quarter2006. Reported earnings per share in the second quarter were $0.95. ExcludingMedImmune and restructuring costs, adjusted earnings per share were $1.19compared with $1.02 in 2006, an increase of 13 percent. The combined sales of five key growth products (NexiumTM, SeroquelTM, CrestorTM,Arimidex(TM)and SymbicortTM) grew by 12 percent in the second quarter to $3,797million. Nexium(TM)sales in the second quarter were $1,312 million, unchanged at CER.Sales in the US were down 1 percent as generic omeprazole has captured most ofthe growth in the US PPI market. Nexium(TM)continues to gain share from theother branded PPIs. The US sales decline was offset by a 2 percent increase inNexium(TM)sales in other markets. Seroquel(TM)sales increased 11 percent to $963 million in the second quarter.Sales in the US were up 9 percent as continued expansion in use for bipolardisorder has led to good volume growth, partially offset by the lower revenuesper prescription for this indication. Sales in other markets were up 17percent. The launch of Seroquel XR(TM)for the treatment of schizophrenia inadult patients is planned for August in the US. The regulatory filing forSeroquel XR(TM)in Europe is under review. Crestor(TM)sales in the second quarter were up 38 percent to $678 million. Salesin the US were up 30 percent. Sales in other markets were up 47 percent, aidedby good uptake from the launch in Japan. Arimidex(TM)sales increased 10 percent in the second quarter, on a 14 percentincrease in the US and 7 percent sales growth in other markets. Symbicort(TM)sales in the second quarter were up 25 percent to $414 million,including $30 million in stocking sales in the US ahead of the launch on 25June. Sales in other markets were up 15 percent. First Half For the first half, sales increased 8 percent at CER, or 11 percent on an asreported basis; currency movements had a 3 percent positive impact on reportedsales growth. Sales in the US were up 9 percent. In other markets, sales inEstablished ROW were up 4 percent; 17 percent sales growth was achieved inEmerging Markets. Combined sales of five key growth products were up 15 percentin the first half to $7,411 million, driven by strong growth in CrestorTM,Seroquel(TM)and Symbicort(TM). Reported operating profit was $4,143 million, down 1 percent at CER; currencymovements had a 2 percent positive impact. Excluding $458 million inrestructuring costs charged in the first half 2007 and the impact fromMedImmune, underlying operating profit increased by 13 percent. Reportedearnings per share were $1.97 in the first half. Excluding MedImmune andrestructuring costs, adjusted earnings per share were $2.25 compared with $1.92in 2006, an increase of 15 percent. Enhancing Productivity Management firmly believes that improving productivity and efficiency in allparts of the organisation is a strategic imperative in order to drivecompetitive financial performance in an increasingly challenging externalenvironment. In February, the Company announced a three-year programme to improve assetutilisation within the global supply chain. Since that announcement, theCompany has identified, and the Board has approved, additional initiativesrelated to European Sales and Marketing, Information Services and BusinessSupport infrastructure, as well as restructuring activities in Research andDevelopment. The aggregate cost of all of these programmes, including an expanded scope tothe supply chain programme, is estimated to be $1,600 million, of which $458million has been charged to the first half results. When fully implemented, thenet reduction in positions will be around 7,600. The annual benefit when theseprogrammes are complete is expected to be in excess of $900 million in 2010 (atcurrent rates of exchange). All reductions in positions are subject toconsultations with works councils, trade unions and other employeerepresentatives and in accordance with local labour laws. (See page 11 fordetails on the costs, timings and expected benefits for each of theseproductivity programmes.) The Company will continue to explore furtheropportunities to reduce the cost base and improve future profitability, butthese are unlikely to significantly impact the 2007 charge. MedImmune Synergies Since the acquisition, synergies totalling $450 million have been identifiedfrom SG&A ($105 million), manufacturing ($25 million), small molecule Researchand Development ($115 million) and revenue investments from the build-up ofAstraZeneca's biologics strategy that no longer need to be made ($205 million).These synergies increase to over $500 million in 2010. The implementation costis around $375 million. The acquisition will be accretive to Core Earnings perShare by 2009. (See below and page 14 for a definition of Core Earnings perShare). Core Earnings per Share With the acquisition of MedImmune and the various payments related to exitarrangements with Merck in the first half of 2008, the income statement will beimpacted by significant accounting amortisation charges going forward. Togetherwith ongoing restructuring costs, this has led the Company to conclude that analternative measure of performance is required in addition to reported earningsper share in accordance with IFRS. This alternative measure will be termed "Core Earnings per Share" (Core EPS). The Company will report Core EPS beginningwith these second quarter results, and it is anticipated that 2008 earningsguidance will be founded on this measure. This measure is defined on page 14. Future Prospects Following the completion of the acquisition of MedImmune, Inc. a recalibrationof the Company's earnings guidance for the full year is now warranted. This recalibration will use as its starting point the $3.80 to $4.05 earningsper share target range we communicated at the beginning of the year, andreconfirmed in the first quarter. This range excluded any contribution from USsales of Toprol-XL(TM)(and its authorised generic) and any one-off costsassociated with productivity initiatives. Based on the underlying performanceof the AstraZeneca business, this range is now revised to earnings per sharebetween $3.90 and $4.05. The MedImmune business has been consolidated from 1 June, and hence the fullyear results will include intangible amortisation of approximately $245 million,the $49 million in one-off costs related to the acquisition charged in thesecond quarter and the initial costs and benefits from the synergies programme.The Company's revised guidance for 2007 earnings per share, including MedImmunerelated financing costs, is now in the range of $3.60 to $3.75 per share(excluding Toprol-XL(TM)in the US and restructuring costs). In addition, the Company estimates that around $900 million ($0.44 per share) ofthe total productivity programme costs of $1,600 million will be charged in2007. In the first half, US sales of Toprol-XL(TM)contributed $0.27 to earnings pershare. Under the current scenario of generic competition on just the 25mgtablet, contribution from US sales of the Toprol-XL(TM)product range is expectedto generate EPS of around $0.04 per month; this estimate will be updated asmarket conditions change. Disclosure Notice: The preceding forward-looking statements relating toexpectations for earnings and business prospects for AstraZeneca PLC are subjectto risks and uncertainties, which may cause results to differ materially fromthose set forth in the forward-looking statements. These include, but are notlimited to: when and if additional generic competitors to Toprol-XL(TM)areintroduced in the US market prior to completion of Appellate Court process, therate of growth in sales of generic omeprazole in the US, continued growth incurrently marketed products (in particular CrestorTM, NexiumTM, SeroquelTM,Symbicort(TM)and ArimidexTM), the growth in costs and expenses, interest ratemovements, exchange rate fluctuations, and the tax rate. For further details onthese and other risks and uncertainties, see AstraZeneca PLC's Securities andExchange Commission filings, including the 2006 Annual Report on Form 20-F. Sales All narrative in this section refers to growth rates at constant exchange rates(CER) unless otherwise indicated Gastrointestinal Second Quarter CER % Half Year CER % 2007 2006 2007 2006Nexium(TM) 1,312 1,283 - 2,620 2,472 +4LosecTM/Prilosec(TM) 298 356 -19 577 700 -20Total 1,630 1,654 -4 3,237 3,205 -1 • In the US, Nexium(TM)sales in the second quarter were $855 million, down 1 percent versus last year. In contrast to 2006, when both Nexium(TM)and generic omeprazole were showing strong volume growth whilst combined volumes for other brands were declining, this quarter generic omeprazole has taken most of the market growth, with dispensed tablet volume up 48 percent. Dispensed tablet volume for Nexium(TM)was up 3 percent in the quarter; all other brands combined were flat. • Nexium(TM)sales in the US in the first half were up 4 percent to $1,717 million. • Nexium(TM)sales in other markets in the second quarter increased 2 percent, as growth in Emerging Markets (benefiting from launch in China) and in Canada more than offset declines in Established Markets, particularly Germany and Italy. • Nexium(TM)sales in other markets were up 4 percent in the first half to $903 million. • Prilosec(TM)sales in the US were up 33 percent in the second quarter, resulting in a 14 percent increase in the first half. • Sales of Losec(TM)in other markets declined 26 percent in the first half, although sales continue to grow in Japan and China. Cardiovascular Second Quarter CER % Half Year CER % 2007 2006 2007 2006Crestor(TM) 678 480 +38 1,306 867 +47Seloken(TM)/Toprol-XL(TM) 457 478 -6 901 934 -5Atacand(TM) 318 276 +9 614 530 +10Plendil(TM) 74 70 - 139 142 -7Zestril(TM) 76 78 -8 156 153 -3Total 1,755 1,540 +10 3,408 2,930 +13 • In the US, Crestor(TM)sales in the second quarter were $353 million, a 30 percent increase over last year. Total prescriptions in the US statin market increased 10 percent in the second quarter; CrestorTM prescriptions were up 28 percent in the same period. Crestor(TM)share of total prescriptions in the US statin market was 8.6 percent in June 2007, broadly unchanged from December 2006, which, although somewhat disappointing, is nonetheless a resilient performance in the face of a more than 4 point increase in market share for simvastatin over the same period. In contrast, the market leader Lipitor has lost more than 4 points of market share. • US sales for Crestor(TM)in the first half increased 42 percent to $696 million. • In other markets, Crestor(TM)sales in the second quarter were up 47 percent to $325 million. Sales in the first half were up 54 percent to $610 million. • In the second quarter, Crestor(TM)sales in Western Europe were up 22 percent; sales in Canada were up 48 percent. Volume share of the statin market for Crestor(TM)is now 19.7 percent in Canada; 11.8 percent in the Netherlands; 20.2 percent in Italy; and 14.6 percent in France. • The launch of Crestor(TM)in Japan is off to a good start, achieving 6.7 percent of market share by value in May 2007. • US sales of the Toprol-XL(TM)product range, which includes sales of the authorised generic to Par, were down 10 percent in the second quarter and down 8 percent in the first half. Generic competition was confined to the 25mg dose during this period; generic products accounted for 21 percent of dispensed prescriptions across the entire product range in the second quarter. • Sales of Seloken(TM)in other markets were up 10 percent in the second quarter and 8 percent in the first half on good growth in Emerging Markets. • Atacand(TM)sales in the US were down 2 percent in the second quarter and were up 5 percent in the first half. • Sales of Atacand(TM)in other markets were up 13 percent in the second quarter and 12 percent in the first half. Respiratory Second Quarter CER % Half Year CER % 2007 2006 2007 2006Symbicort(TM) 414 308 +25 768 585 +22Pulmicort(TM) 320 301 +4 721 629 +12Rhinocort(TM) 95 102 -9 187 187 -2Accolate(TM) 19 21 -10 38 39 -3Oxis(TM) 23 22 - 46 44 -2Synagis(TM)* 16 - n/a 16 - n/aFluMist(TM)* - - n/a - - n/aTotal 927 791 +12 1,858 1,556 +14 *Sales of these MedImmune products were consolidated in AstraZeneca accountsfrom 1 June 2007. As a result, there are no prior period sales included. • Symbicort(TM)sales in the second quarter were up 25 percent to $414 million, including $30 million in stocking sales in the US ahead of the launch on 25 June. Sales in other markets were up 15 percent as a result of market growth and share gains, particularly in those markets where Symbicort(TM)SMART(TM)has been introduced. • Symbicort(TM)sales in the first half were up 22 percent to $768 million. • Sales of Pulmicort(TM)in the US increased 7 percent in the second quarter, chiefly as a result of the performance of Pulmicort(TM)RespulesTM, for which sales were up 23 percent. US sales of Pulmicort(TM)products were up 19 percent in the first half. • Pulmicort(TM)sales in other markets were down 1 percent in the second quarter and up 2 percent in the first half. • Sales of Rhinocort(TM)Aqua in the US were down 5 percent in the first half. Total prescriptions declined 12 percent. • Respiratory product sales include one-month sales of Synagis(TM)totalling $16 million. Synagis(TM)sales are highly seasonal, with the majority of sales recorded in the fourth and first quarters, timed to the incidence of respiratory syncytial virus. Oncology Second Quarter CER % Half Year CER % 2007 2006 2007 2006Arimidex(TM) 430 379 +10 831 714 +12Casodex(TM) 331 306 +5 641 580 +7Zoladex(TM) 275 250 +6 524 481 +5Iressa(TM) 61 62 - 113 112 +2Faslodex(TM) 53 47 +9 102 91 +8Nolvadex(TM) 20 24 -17 39 45 -13Ethyol(TM)* 8 - n/a 8 - n/aTotal 1,195 1,071 +8 2,291 2,029 +9 * Sales of this MedImmune product were consolidated in AstraZeneca accounts from1 June 2007. As a result, there are no prior period sales included.• In the US, sales of Arimidex(TM)were up 14 percent in the second quarter to $178 million. Total prescriptions for Arimidex(TM)increased 9 percent in the first half. Arimidex(TM)is the market leader among hormonal treatments for breast cancer, with market share of total prescriptions of 38 percent. Sales in the first half were up 20 percent. • Arimidex(TM)sales in other markets were up 7 percent in both the second quarter and the first half. First half sales were up 13 percent in Japan and increased 16 percent in Emerging Markets. • Casodex(TM)sales in the US were up 1 percent in the second quarter and 6 percent in the first half. • Casodex(TM)sales in other markets increased 6 percent in the second quarter and 7 percent in the first half. First half sales were up 7 percent in Western Europe and increased 15 percent in Japan. • Iressa(TM)sales were up 2 percent in the first half to $113 million. First half sales were up 6 percent in Japan and were 40 percent higher in China. • Faslodex(TM)sales in the first half were up 8 percent. Sales in the US were unchanged; sales in other markets increased 18 percent. Neuroscience Second Quarter CER % Half Year CER % 2007 2006 2007 2006Seroquel(TM) 963 849 +11 1,886 1,656 +12Zomig(TM) 106 103 -1 213 196 +5Total 1,293 1,178 +7 2,520 2,314 +6 • In the US, Seroquel(TM)sales were up 9 percent in the second quarter to $678 million. Total prescriptions were up 12 percent in the first half, nearly twice the rate of market growth for antipsychotics. As the only single agent indicated for both the mania and depressive phases of bipolar disorder, Seroquel(TM)usage continues to expand in this segment, although growth in this indication does lead to somewhat lower revenue per prescription as a result of the lower doses used. • Seroquel(TM)sales in the US were up 10 percent in the first half. • The launch of Seroquel XR(TM)in the US is planned for August. Seroquel XR(TM)provides the benefits of an improved dosage titration, with an effective dose reached by day 2, and the convenience of once daily dosing for the treatment of adult patients with schizophrenia. The regulatory filing for Seroquel XR(TM)in Europe is under review. • Seroquel(TM)sales in other markets were up 17 percent in both the second quarter and the first half, on good growth in Western Europe and Emerging Markets. • Sales of Zomig(TM)were up 5 percent in the first half, with sales in the US up 3 percent and sales in other markets up 5 percent. Geographic Sales Second Quarter CER % Half Year CER % 2007 2006 2007 2006North America 3,542 3,340 +6 7,030 6,472 +9 US 3,268 3,077 +6 6,502 5,959 +9Established ROW* 2,842 2,586 +3 5,506 4,941 +4Emerging ROW 889 699 +21 1,703 1,392 +17 *Established ROW comprises Western Europe (including France, UK, Germany, Italy,Sweden and others), Japan, Australia and New Zealand.• Sales in the US were up 6 percent in the second quarter, with CrestorTM, SeroquelTM, Arimidex(TM)and stocking sales for Symbicort(TM)accounting for most of the growth. • Sales growth in the Established Rest of World segment was 3 percent in the second quarter. Sales in Western Europe were up 1 percent, as increases in SymbicortTM, Crestor(TM)and Seroquel(TM)managed to offset the declines in Losec(TM)and Nexium(TM). Sales in Japan were up 8 percent, with sales of Crestor(TM)and Oncology products fuelling much of the increase. • Sales in Emerging Markets increased 21 percent in the second quarter. Sales in Emerging Europe were up 19 percent. Sales in China increased 25 percent in the quarter. Operating Review All narrative in this section refers to growth rates at constant exchange rates(CER) unless otherwise indicated Second Quarter Reported sales increased by 10 percent and operating profit fell by 7 percent.At constant exchange rates, sales increased by 6 percent and operating profitfell by 11 percent. Excluding the impact of MedImmune and restructuring costs,operating profit increased by 11 percent. Quarter Two Operating Profit CER % EPS CER % $m Reported 1,973 -11 $0.95 -11MedImmune 103 n/a $0.06 n/aRestructuring Costs 376 n/a $0.18 n/aUnderlying 2,452 +11 $1.19 +13 Currency movements increased sales by 4 percent and operating profit by 4percent. In comparison to last year, the dollar was 7 percent weaker against theeuro, increasing sales, and also against the Swedish krona (7 percent) andsterling (8 percent), increasing costs. The net effect of these currencymovements was a positive impact of 4 cents on earnings per share. Underlying US sales growth is slightly ahead of reported growth of 6 percentafter adjusting for managed market accruals, inventory movements and provisionmovements. Outside the US, sales increased by 6 percent. In the second quarter, reported operating margin was 27.1 percent. Excluding theMedImmune operating loss of $103 million and restructuring costs of $376million, underlying operating margin was 33.8 percent, an increase of 1.6percentage points on the second quarter in 2006 (see table below). Quarter Two Reported % Restructuring MedImmune $m Underlying % Change versus costs PY* $m Gross Margin 77.1 (199) 18 79.8 +0.8Distribution 0.9 - (1) 0.9 -R&D 16.9 (29) (28) 16.1 -1.7SG&A 35.8 (148) (120) 32.2 +2.3Other Operating Income 3.6 - 28 3.2 +0.2Operating Profit 27.1 (376) (103) 33.8 +1.6 *Positive number indicates favourable effect on operating profit versus prioryear Underlying gross margin of 79.8 percent in quarter two is 0.8 percentage pointshigher than last year. Payments to Merck, at 4.2 percent of sales, were 0.4percentage points lower than last year. Currency increased margin by 0.4percentage points, counterbalancing a negative 0.4 percentage point impact fromincreased royalty payments. Excluding the effect of these additional factors,gross margin increased by 0.4 percentage points, due to continuing operationalefficiencies. Underlying R&D expenditure was $1,168 million in the second quarter, up 14percent over last year due principally to increased activity levels and theeffect of the externalisation strategy, particularly those relating to CambridgeAntibody Technology and the collaboration with Bristol-Myers Squibb. Underlying SG&A costs of $2,337 million were 2 percent lower than quarter two in2006 as operating efficiencies continue to be driven from our sales andmarketing activities. The inclusion of MedImmune, Inc. added $120 million,including intangible amortisation of $35 million and one-off costs of $49million resulting from the acquisition. Underlying other income of $231 million was $31 million above the second quarterin 2006 and increased operating margin by 0.2 percentage points. Included withinthe second quarter were gains of $139 million realised from the disposal ofnon-core Infection products in Scandinavia, originally expected to occur in thesecond half of 2007. In the second quarter of 2006, a gain of $109 million wasrecognised on the divestment of US anaesthetic and analgesic products to AbraxisBioScience, Inc. Other Income relating to MedImmune, Inc. amounted to $28million and included a one-off gain of $17 million. Included within cost of sales is the movement in the fair value of financialinstruments used to manage our transactional currency exposures; the net gain inthe quarter was $8 million (compared with a loss of $20 million for the sameperiod last year). Other fair value movements of $10 million were chargedelsewhere in the income statement. First Half Reported sales increased by 11 percent and operating profit increased by 1percent. At constant exchange rates, sales increased by 8 percent and operatingprofit fell by 1 percent. Excluding the effect of MedImmune and restructuringcosts, operating profit increased by 13 percent. Half One Operating Profit CER % EPS CER % $m Reported 4,143 -1 $1.97 +1MedImmune 103 n/a $0.06 n/aRestructuring Costs 458 n/a $0.22 n/aUnderlying 4,704 +13 $2.25 +15 Currency movements increased reported sales by 3 percent and operating profit by2 percent. Cumulatively, exchange has increased earnings per share by 3 cents.If current exchange rates are maintained for the remainder of the year, nofurther benefits are expected to accrue. Underlying US sales growth is broadly in line with reported growth of 9 percentafter adjusting for managed market accruals, inventory movements and provisionmovements. Outside the US, sales increased by 7 percent. In the first six months, reported operating margin was 29.1 percent. ExcludingMedImmune and restructuring costs of $458 million, underlying operating marginwas 33.1 percent, an increase of 1.0 percentage points on 2006 (see tablebelow). Half One Reported % Restructuring MedImmune Underlying % Change versus costs PY $m $m Gross Margin 77.8 (281) 18 79.8 +0.4Distribution 0.8 - (1) 0.9 -R&D 16.8 (29) (28) 16.4 -2.2SG&A 33.9 (148) (120) 32.0 +2.4Other Operating Income 2.8 - 28 2.6 +0.4Operating Profit 29.1 (458) (103) 33.1 +1.0 Underlying gross margin of 79.8 percent is 0.4 percentage points higher thanlast year. Payments to Merck, at 4.3 percent of sales, were 0.3 percentagepoints lower than last year. Currency increased gross margin by 0.1 percentagepoints whilst higher royalty payments reduced margin by 0.4 percentage points.Included in the first half were provisions totalling $24 million for fixedassets and supplier commitments relating to the termination of AGI-1067development. Excluding the effect of these additional factors, gross marginincreased by 0.6 percentage points due to continuing operational efficienciesand a favourable geographic sales mix. Underlying R&D expenditure was $2,338 million in the first half of 2007, up 20percent over last year due principally to increased activity levels and theeffect of the externalisation strategy. Also included in this period are thefirst quarter intangible impairments in respect of collaborations withAtheroGenics and Avanir. SG&A costs excluding restructuring and MedImmune were 1percent lower than the first half in 2006. Included within cost of sales is the movement in the fair value of financialinstruments used to manage our transactional currency exposures; the net gain inthe first half was $9 million (compared with a loss of $21 million for the sameperiod last year). Other fair value movements of $11 million were chargedelsewhere in the income statement. Restructuring Costs In April 2007, the Company announced its intention to bring forward productivityinitiatives, in addition to the programme to improve asset utilisation withinits global supply chain, to enhance the long-term efficiency of the business. Asof 30 June, the Board has approved the following programmes: Total Charged at 30 Estimated June Programme $m $mGross Margin Global Supply Chain 750 281 SG&A European Sales Force Restructuring 300 146 IS and Business Infrastructure 450 2 R&D Restructuring of Clinical, Regulatory Affairs 100 29and Disease Area Strategy TOTAL (REPORTED BASIS) 1,600 458 Of which cash costs: 1,300 439 Implementation of the Global Supply Chain productivity initiative is progressingwell and has been expanded to add new opportunities to further strengthen grossmargin going forward. These projects have an additional cost of $150 million.With respect to the total programme, the charge in 2007 is now anticipated to bearound $350 million, full payback is expected in three years on a cash basis andtotal headcount reduction is estimated at around 3,300. The Company has undertaken a strategic review of the sales and marketingresources required in Europe for the next three years. This review hasidentified a number of different programmes, which will reduce total headcountby around 1,800 positions. The total costs of restructuring have been estimatedat approximately $300 million, with around $200 million to be charged in 2007.The improvement in the cost base following restructuring should ensure thatbenefits begin to be realised in 2007 with a full payback by 2009. Within our IS and Business Support infrastructure, programmes to focus onimproved productivity and strategic sourcing as we better use our global scaleare anticipated to reduce headcount by approximately 1,800 positions. Totalcosts of these programmes are expected to amount to around $450 million, withapproximately $250 million to be charged in 2007. Full payback is expected by2009. R&D restructuring activity and costs include implementing the previouslyannounced Disease Area Strategy, streamlining the Global Regulatory function,and our intention to create a substantially more efficient clinical datamanagement capability. Headcount reductions of approximately 700 are expected.In aggregate, R&D restructuring costs of around $100 million are expected overthe next two years, with the majority being charged in 2007. Full payback isexpected by 2009. The Company will continue to look for further initiatives to improve thelong-term efficiency of the business. All reductions in positions detailed aboveare subject to consultations with works councils, trade unions and otheremployee representatives and to being in accordance with local labour laws. Toprol-XLTM In the first half, Toprol-XL(TM)contributed US sales of $670 million (2006 $732million) and EPS of 27 cents (2006 26 cents). To date only one Toprol-XLTMtablet strength (25mg) is facing generic competition and it is not possible topredict if or when further generic tablet strengths may be launched. IfToprol-XL(TM)were excluded from the first half results for both the current andprior year periods, sales growth would be 9 percent (versus 8 percent on areported basis) and EPS growth would be flat (compared with a 1 percent increaseas reported). Using the same basis in the second quarter, sales would be up 7percent (compared with a 6 percent increase as reported) and EPS would be down13 percent (compared with a 11 percent decline as reported). Interest and Dividend Income Net interest and dividend income for the first half was $115 million (2006 $146million) and $18m in the second quarter (2006 $78 million). The decrease versusthe second quarter of 2006 is primarily attributable to the interest payable onthe borrowings to acquire MedImmune, Inc. The reported amounts include $16million (2006 $24 million) in the first half and $8 million (2006 $12 million)in the second quarter arising from employee benefit fund assets and liabilitiesreported under IAS 19, 'Employee Benefits'. Taxation The effective tax rate for the second quarter is 27.8 percent (2006 27.5percent) and 29.5 percent for the first half (2006 28.9 percent). For the fullyear the tax rate is anticipated to be around 29 percent, with the acquisitionof MedImmune, Inc. not expected to have a significant effect. Cash Flow Free cash flow (net cash generated and available for acquisitions ordistribution to shareholders) for the six months was $2,662 million, compared to$2,922 million in 2006; lower principally as a result of higher working capitaland tax payments. Returns to shareholders were $3,910 million (through net sharerepurchases of $2,032 million and the dividend payment of $1,878 million). Theinvestments in the acquisitions of MedImmune, Inc., and Arrow TherapeuticsLimited were $14,543 million. This, together with $886 million of net debtacquired with MedImmune, Inc. led to net funds of $6,537 million at thebeginning of the period becoming net debt of $10,088 million at 30 June. Cash generated from operating activities in the period was $3,184 million, $237million lower than in 2006. The decrease is due to a $468 million increase intax cash paid and a $237 million outflow from increased working capitalrequirements, which more than offsets the increase in operating profit (afteradding back non-cash items). Net cash outflows from investing activities were $14,493 million in the period,compared to $11 million in 2006. This is primarily due to $14,543 millionpayments made in respect of the acquisitions noted above. Acquisition of MedImmune, Inc. (i) Acquisition Accounting Following the acquisition of MedImmune, an independent valuation exercise hasbeen undertaken to allocate the purchase price between the assets andliabilities acquired (including tangible assets, intangible assets and deferredtax) and goodwill, under IFRS 3 'Business Combinations'. In summary terms, thepurchase price for outstanding shares of $13.9 billion has been allocatedbetween intangible assets of $8.3 billion (including assets in respect of theSynagis(TM)and Numax(TM)RSV franchise, FlumistTM, Ethyol(TM)and products indevelopment), goodwill of $8.6 billion and net liabilities of $3.0 billion. Thisallocation, based on a strict accounting guidance, does not allow for theseparate recognition of valuable elements such as buyer specific synergies,potential additional indications for identified products or the premiumattributable to a well established, highly regarded business in the innovativebiologics market. Such elements are instead subsumed within goodwill, which isnot amortised. This more conservative balance between goodwill and intangibleassets results in an amortisation charge of approximately $420 million perannum, compared to the $750 million assumed at the time of the acquisition. (ii) Synergies At the time of the acquisition announcement, the Company committed to a synergytarget of towards $500 million and plans are now in place to deliver synergiesof $450 million in 2009 and over $500 million in 2010. The breakdown of thesynergies is as follows: $mSales and marketing costs 50 General and administrative costs 55 Manufacturing 25 AZ Biologics investments* 205 Small molecules 115 Total 450 *Included in the AZ base case and forecasts were investments to build CambridgeAntibody Technology from a biologics discovery unit to a fully fledged biologicscompany. As MedImmune, Inc. already possesses these skills and capabilities theAZ internal investments no longer need to be made. The savings represent the removal of duplication in all functional areastogether and the consequences of a comprehensive review of the capabilities andportfolios within the two organisations. In addition, capital expenditureplanned in AstraZeneca will no longer be required, saving over $500 million. Thecost of implementation of the required programmes is expected to amount toapproximately $375 million. (iii) Flumist(TM)update On 25 May, MedImmune issued a press release indicating that it had received aWarning Letter from the FDA relating to compliance issues at the company's UK-1manufacturing plant. Consequently, MedImmune is currently precluded fromdistributing FluMist(TM)in the US. Additionally, the expected FDA approval toexpand the vaccine's label to include children 2 to 5 years of age has beendelayed. The Company takes the FDA's observations at the UK-1 plant veryseriously and is working to resolve the FDA's concerns as quickly as possible.Toward this end, the Company has submitted a number of documents, plans andassessments to the FDA, most notably a full formal response to the WarningLetter on 7 June and the first periodic progress report on 11 July. MedImmune's last sales guidance on FluMist(TM)for the 2007/2008 flu season was toexpect approximately 75% to 100% more doses to be sold than in the 2006/2007 fluseason. This guidance was based on the assumption that the approvals for theliquid formulation (known as CAIV-T) and the label expansion to include youngerchildren both occurred prior to the 2007 influenza season. While the liquidformulation was approved in January 2007, the current Warning Letter hasobviously delayed the other critical step in the process to relaunch an improvedFluMist(TM)this coming season. Currently, the Company continues to believe thatit will be able to resolve the Warning Letter with the FDA in time to distributeFluMist(TM)in the US prior to the flu season and as such, the Company alsocontinues to believe that it will achieve sales in the 2007/2008 season that areat or near the lower end of its previously stated range of expectations. Investments In June, the Company paid $48 million for the last in a series of sales-basedmilestone payments in relation to Zomig(TM). In July, the Company entered a three-year research and development collaborationwith Silence Therapeutics plc to discover and develop proprietary siRNAmolecules. The agreement is primarily in relation to the Respiratory field butincludes an option to allow for targets that extend the collaboration into otherdisease areas of interest to the Company. The initial access fee of $5 millionwill be capitalised as an intangible asset and the $10 million equity investmentwill be capitalised as a non-current asset investment. Core Earnings per Share Management believes that investors' understanding of the Company's performanceis enhanced by the disclosure of Core EPS, as it provides an understanding ofthe underlying ability to generate returns to shareholders. The Core EPSmeasure is adjusted to exclude certain significant items, such as charges andprovisions related to restructuring and synergy programmes, amortisation of thesignificant intangibles arising from corporate acquisitions and those related toour current and future exit arrangements with Merck in the US, and otherspecified items. Core EPS is not, and should not be viewed as, a substitute forEPS in accordance with IFRS. The reconciliation of second quarter and first half Core EPS to reportedearnings per share is provided below: 2nd 2nd Half Year Half Year Quarter Quarter CER 2007 2006 2007 2006 CER % % Reported EPS $0.95 $1.02 -11 $1.97 $1.92 +1 Restructuring Costs $0.18 - n/a $0.22 - n/a Amortisation of intangible assets MedImmune acquisition $0.02 - n/a $0.02 - n/a Merck arrangements $0.02 $0.02 n/a $0.03 $0.03 n/a Core EPS $1.17 $1.04 +9 $2.24 $1.95 +13 Shareholder Return and Capital Structure In the light of the MedImmune, Inc. acquisition, the Board has reviewed both itsdistribution policy and its overall financial strategy. The Board recognises theneed to balance the interests of the business, our shareholders and ourfinancial creditors, whilst maintaining a strong investment grade credit rating.It is intended that our current level of gross debt of $15 billion will bereduced over the next 3 to 4 years to a target level of $6-7 billion oflong-term debt (net of cash). Re-financing is expected to take place before theend of the year. The Company is in discussions with the credit rating agencies, and is targetinga rating which allows flexibility to: • Provide the necessary funding for opportunities to further strengthen the pipeline;• Fund the Partial Retirement from our US Limited Partnership and possible First Option exercise by Merck in the first half of 2008; and• Pay down debt within the next 3 to 4 years to reach our target level. In this environment, the share re-purchase programme will be reviewed annuallyby the Board until the target level of long-term debt is achieved, taking alsointo account the Board's target credit rating, business cash flow and investmentopportunities. The 2007 share re-purchase programme will remain at thecommitted level of $4 billion. The Board will determine the level of the 2008buyback in conjunction with the Annual Results announcement in January; it iscurrently envisaged that the buyback is likely to be in the region of $1billion. The Board's dividend policy is unchanged; it is intended this will continue togrow in line with reported earnings (before restructuring costs). Consistentwith this policy, the Board has declared a First Interim Dividend for 2007 of$0.52 per Ordinary Share (25.3 pence, SEK 3.49), payable on 17 September 2007.We aim to maintain at least two times dividend cover. Share Re-purchase Programme During the second quarter, 17.9 million shares were re-purchased forcancellation at a total cost of $976 million bringing the total re-purchases forthe first half of the year to 39.0 million shares at a total cost of $2,160million. During the first six months, 2.7 million shares were issued inconsideration of share option exercises for a total of $128 million. The total number of shares in issue at 30 June 2007 was 1,496 million. The share re-purchase programme is calculated to have added 4 cents to EPS forthe half year after allowing for an estimate of interest income foregone. R&D Update An updated R&D pipeline table has been issued in conjunction with thepublication of this press release. A copy of this table is available on theCompany's website, www.astrazeneca.com, under information for investors. Half year pipeline highlights include four new projects in Phase III developmentfor launch, including two molecules which have progressed to Phase IIIdevelopment: • ZD4054, a specific Endothelin A antagonist for the treatment of hormone resistant prostate cancer, which has shown survival benefits in Phase II, has progressed to Phase III. • Dapagliflozin, a first in class oral SGLT2 inhibitor for type 2 diabetes being jointly developed with Bristol-Myers Squibb has also progressed to Phase III. • The acquisition of MedImmune added the Phase III product Motavizumab, a novel monoclonal antibody against Respiratory Syncytial Virus (RSV), which will be submitted for a Biologics License Application (BLA) this year. • RecentinTM, a VEGF/EGF TKI inhibitor will be commencing Phase III development for recurrent glioblastoma in addition to its ongoing development in non-small cell lung cancer and colorectal cancer indications. The Iressa(TM)Phase III INTEREST study met its primary objective and demonstratedequivalent survival for Iressa(TM)and docetaxel in pre-treated NSCLC patients.This is the first time an EGFR-TKI has demonstrated non-inferior survival tochemotherapy in a head to head Phase III study in this setting. The Company isdiscussing these results with regulatory authorities. The data have beenaccepted for presentation at the World Congress of Lung Cancer in September2007. In July 2007, AstraZeneca submitted an sNDA to the FDA for a new indication forSeroquel(TM)for the maintenance treatment of patients with bipolar I disorder asadjunct to mood stabiliser based on data from two clinical trials. Pooled datashowed a greater incidence of blood glucose increases to hyperglycemic levels inpatients randomised to Seroquel(TM)and mood stabiliser than in patientsrandomised to placebo and mood stabiliser. Seroquel(TM)U.S. PrescribingInformation has been updated to include additional details regarding these data. Ten new molecules have had their first dosing in man since 1 February, bringingthe year to date total to fourteen, a record number for AstraZeneca, with anumber of additional opportunities planned for the second half. The pipeline has been significantly enhanced by the addition of the MedImmuneportfolio which includes 14 products in clinical development and a further 28projects. The majority of the MedImmune portfolio is in monoclonal antibodiesand vaccines. The extensive development and commercial antibody productioncapabilities give AstraZeneca the capacity and skills to deliver an industryleading biologicals product range significantly ahead of plan. The overall pipeline now includes 157 projects. Since 1 February 2007, 20projects have progressed to their next phase of development; 53 compounds added(including 42 new projects from MedImmune, 14 of which are clinical); 16compounds have been withdrawn. We have made considerable progress in speeding up delivery of our projects.Over the last two years we have demonstrated clear progress in reducing ouroverall development times and are progressing towards our target of 8 years fromfirst formal toxicology to first approval. This target is a median across allprojects and we expect a number of projects, therefore, to deliver on an evenfaster timescale. In addition to improving the quality of the pipeline and placing an emphasis onthe late phase portfolio, we are reshaping R&D into a more lean and agileorganisation. We have implemented the previously announced Disease AreaStrategy and, in addition, have made changes to our Regulatory andPharmaceutical areas, which has both reduced cost and increased effectiveness.Additionally, we will be outsourcing some of our non-core activities inClinical, the first tranche of which is Data Processing. The changes announcedto date will result in a reduction of approximately 700 positions. Calendar1 November 2007 Announcement of third quarter and nine months 2007 results6 December 2007 Business Review-Biologics David BrennanChief Executive Officer This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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