Interim Results Part 1 of 3

RNS Number : 2902A

AstraZeneca PLC

31 July 2008

 

AstraZeneca PLC

Second Quarter and First Half Results 2008

• Solid performance with sustained progress on the key priorities.

-First half sales increased by 3 percent at constant exchange rates (CER). Core EPS increased by 3 percent at CER to $2.53. 

-Second quarter sales increased by 2 percent at CER. Core EPS down 4 percent at CER to $1.25 on higher net interest expense.

-Second quarter sales in Emerging Markets increased by 20 percent at CER and exceeded $1 billion for the first time in a quarter.

-Core EPS target for the full year increased by $0.15 to reflect good operational and financial performance and further currency benefits realised in the year to date*. Revised target range for Core EPS is $4.60 to $4.90.

• Continued progress on strengthening and balancing the pipeline.

-Two new Phase III progressions increase late stage development pipeline to twelve projects now in Phase III/registration.

-Second major regulatory filing in 2008 accomplished. ONGLYZA™ (saxagliptin) submitted for regulatory approval in US and European Union for the treatment of type 2 diabetes.  

• Summary Judgement ruling in US upholds valid intellectual property for Seroquel.

• The Board has recommended a first interim dividend of $0.55. 

   Financial Summary

Group	2nd Quarter 2008 $m	2nd Quarter 2007 $m	Actual %	CER %		Half Year 2008 $m	Half Year 2007 $m	Actual %	CER %
Sales	7,956	7,273	+9	+2		15,633	14,239	+10	+3
Reported
Operating Profit	2,473	1,973	+25	+12		4,730	4,143	+14	+3
Profit before Tax	2,279	1,991	+14	+1		4,422	4,258	+4	-7
Earnings per Share	$1.11	$0.95	+17	+4		$2.14**	$1.97	+9	-3
Core***
Operating Profit	2,737	2,409	+14	+3		5,502	4,683	+17	+7
Profit before Tax	2,543	2,427	+5	-6		5,194	4,798	+8	-2
Earnings per Share	$1.25	$1.17	+7	-4		$2.53	$2.24	+13	+3

*	For the second half of 2008 guidance is based on original assumptions for currency: fourth quarter 2007 average rates.
**	Included in Reported EPS for Half Year 2008 is a $0.12 charge taken in Q1 08 for impairment of intangible assets related to Ethyol.
***	Core financial measures are supplemental non-IFRS measures which management believe useful to understanding the Company's performance; it is upon these measures that financial guidance for 2008 is based. See pages 8 and 9 for a reconciliation of Core to Reported financial measures.

David Brennan, Chief Executive Officer, said: 'During the first half of 2008 AstraZeneca has made good progress on three fronts: performance, pipeline and patents. The business is on track to achieve our increased financial target for the year and we continue to strengthen the pipeline. In addition, we have mitigated the biggest near-term financial risks with the Nexium patent settlement and the successful Summary Judgement Motion for Seroquel.'

London, 31 July 2008

  Business Highlights All narrative in this section refers to growth rates at constant exchange rates (CER) unless otherwise indicated

Second Quarter 

Sales in the second quarter increased by 2 percent at CER, or 9 percent on an as reported basis. Sales in the US were down 4 percent as a result of the decline in Toprol-XL sales due to generic competition. Excluding Toprol-XL, sales growth in the US was 4 percent. Sales in the Rest of World were up 7 percent. Sales in Established Markets were up 2 percent, which included double-digit sales growth in Japan. Sales in Emerging Markets increased by 20 percent.

Core operating profit in the second quarter was up 3 percent to $2,737 million, as improvement in Core gross margin and efficiencies in R&D were partially offset by the impact of higher SG&A costs in the quarter and lower other income compared to second quarter last year. Reported operating profit increased by 12 percent to $2,473 million as a result of lower restructuring and synergy costs compared to the second quarter 2007.

Core earnings per share in the second quarter were $1.25 compared with $1.17 in the second quarter 2007, 4 percent lower at CER, as the increase in Core operating profit and the benefit of a lower number of shares outstanding was more than offset by higher net interest expense. Reported earnings per share in the second quarter were $1.11, an increase of 4 percent.

First Half

Sales in the first half increased by 3 percent at CER, or 10 percent on an as reported basis. Sales in the US were unchanged, as the inclusion of MedImmune sales offset the decline in Toprol-XL sales in the US. Sales in the Rest of World were up 5 percent. Sales in Established Markets were up 2 percent, with sales in Western Europe unchanged. Sales in Emerging Markets were up 16 percent.

Core operating profit increased 7 percent to $5,502 million as a result of improvements in gross margin and R&D efficiencies partially offset by lower other operating income and slightly higher SG&A costs. Reported operating profit was $4,730 million, up 3 percent, as the benefit arising from lower restructuring and synergy costs in the current period was partially offset by a full half-year of MedImmune amortisation expense and the Ethyol impairment charge in the first quarter 2008.

Core earnings per share in the first half were $2.53, an increase of 3 percent. Reported earnings per share in the first half were $2.14, a decrease of 3 percent.

Research and Development Update

On 23 July 2008, AstraZeneca and Bristol-Myers Squibb announced that the regulatory submissions have been made in the US and the European Union for ONGLYZATM (saxagliptin), a new compound for the treatment of type 2 diabetes. The EU submission was 15 months earlier than originally planned.

The ONGLYZATM filing is the second of three submissions for new chemical entities that were planned for this year. The third filing, for the investigational cancer treatment Zactima, is now expected to occur in the first half of next year, as a result of a slow down in event rates in the clinical trials that support the registration.  

Since the beginning of 2008 the late stage pipeline has expanded by a further two projects, bringing the total number of projects in Phase III/registration to twelve:

	Based on a successful Phase IIb proof of concept programme, the decision has been taken to progress the oral direct thrombin inhibitor AZD0837 into Phase III development for the prevention of stroke in patients with atrial fibrillation.
	A Phase III trial for the heat shock protein 90 (Hsp90) inhibitor MEDI-561/IPI-504 for the orphan indication of treatment of patients with refractory gastrointestinal stromal tumours (GIST) is planned to commence in the third quarter. This compound is being jointly developed by AstraZeneca and Infinity Pharmaceuticals, Inc.

The AstraZeneca pipeline now includes 143 projects, including 100 projects in the clinical phase of development. Since the last update on 31 January 2008, 20 projects have progressed to their next phase (including 7 molecules entering first human testing); 15 compounds have been added from Discovery Research; 3 compounds have been withdrawn.

Continued progress has been made in advancing important life cycle management programmes across the portfolio:

	The US submission for Seroquel XR for use in generalised anxiety disorder was made during the second quarter. The EU filing is on track for submission in the fourth quarter 2008.
	Supplemental NDAs (sNDA) were submitted in the US for Symbicort use in COPD and for paediatric asthma in April and June 2008, respectively.
	In May 2008, an sNDA was submitted to the US FDA for Nexium I.V. for injection, seeking approval for use in patients with peptic ulcer bleeding following therapeutic endoscopy. This was followed by a Marketing Authorisation Application (MAA) submission in the European Union in June, with Sweden as Reference Member State.
	In May 2008, an MAA was submitted to the European Medicines Agency seeking approval for Iressa as a treatment for locally advanced or metastatic non-small cell lung cancer (NSCLC) in patients who have been pre-treated with platinum-containing chemotherapy.
	The Phase III Iressa Pan-Asian Study (IPASS) exceeded its primary objective and demonstrated superior progression-free survival for Iressa compared to intravenous carboplatin/paclitaxel chemotherapy. In addition, Iressa demonstrated a more favourable tolerability profile. IPASS was an open-label, randomised parallel-group study which enrolled 1,217 clinically selected Asian patients with advanced NSCLC who had not received prior chemotherapy, whose tumours had adenocarcinoma histology and who had either never smoked, or were long-term ex-smokers. The study data are still being analysed and more detailed study results will be presented at a forthcoming medical congress.

An updated R&D pipeline table has been issued in conjunction with the publication of this press release. A copy of this table is available on the Company's website, www.astrazeneca.com, under information for investors.

Enhancing Productivity

In the second quarter a further $131 million in restructuring and synergy costs associated with the Company wide programme to reshape the cost base were charged to the accounts. This brings the cumulative charges since the inception of the programme to $1,214 million.

The Company remains on track to deliver two-thirds of the total programme benefits of $1.4 billion per annum by the end of this year, with the full savings to be realised by 2010.  

Future Prospects 

The Company has increased its target range for Core earnings per share for the full year by $0.15. Approximately half of the increase reflects the operational and financial performance of the business in the first half and the outlook for the remainder of the year; the balance reflects additional currency benefits realised in the second quarter relative to the currency assumptions upon which the targets were based (i.e. fourth quarter 2007 average exchange rates).

For the remainder of 2008, guidance is based on original assumptions for currency, being fourth quarter 2007 average exchange rates. The new target range is between $4.60 to $4.90 per share. 

This revised target takes no account of the likelihood that average exchange rates for the remainder of 2008 may differ from the fourth quarter 2007 average rates upon which our guidance is based. The Company's estimate of the sales and earnings sensitivity to movements of our major currencies versus the US dollar was provided in conjunction with the full year 2007 results announcement, and remains available on the AstraZeneca website. 

It is not anticipated that the nature of the principal risks and uncertainties that affect the business, and which are set out on pages 193 - 199 of the Annual Report and Form 20-F Information 2007, will change in respect of the second six months of the financial year.

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 %
	2008 $m	2007 $m		2008 $m	2007 $m
Nexium	1,323	1,312	-4	2,561	2,620	-7
Losec/Prilosec	290	298	-13	542	577	-15
Total	1,634	1,630	-6	3,144	3,237	-8

	In the US, Nexium sales in the second quarter were $754 million, a 12 percent decline compared with last year. Volumes were up 11 percent, chiefly on growth in lower priced non-retail channels. Dispensed retail tablet volume grew by 0.4 percent. The back-loaded phasing of lower price realisation over the course of last year will continue to give rise to significant negative price variances this year until the fourth quarter.
	Nexium sales in the US in the first half were down 13 percent to $1,490 million.
	Nexium sales in other markets in the second quarter were up 11 percent to $569 million. Sales growth of 36 percent in Emerging Markets was the key performance driver.
	Nexium sales in other markets were up 6 percent in the first half to $1,071 million.
	The Company continues to expect a mid-single digit decline for worldwide sales of Nexium for the full year.
	Prilosec sales in the US were down 15 percent in the second quarter and 14 percent year to date.
	Sales of Losec in the Rest of World markets were down 12 percent in the second quarter and 15 percent in the first half.

Cardiovascular

	Second Quarter		CER %	Half Year		CER %
	2008 $m	2007 $m		2008 $m	2007 $m
Crestor	916	678	+27	1,688	1,306	+22
Seloken /Toprol-XL	206	457	-58	396	901	-59
Atacand	388	318	+10	734	614	+9
Plendil	70	74	-14	136	139	-10
Zestril	65	76	-24	124	156	-28
Total	1,807	1,755	-5	3,378	3,408	-8

	In the US, Crestor sales in the second quarter were $415 million, an 18 percent increase over last year. Crestor is the only branded statin to gain share in the US during 2008, fuelled by promotion of the atherosclerosis indication. Crestor share of total prescriptions increased to 9.1 percent in June, up 0.5 points since December 2007.  Crestor prescriptions increased 8.0 percent compared with second quarter 2007, more than twice the market rate.
	US sales for Crestor in the first half increased 10 percent to $768 million.
	Crestor sales in the Rest of World were up 37 percent to $501 million in the second quarter, on strong growth in Western Europe (up 19 percent), Canada (up 30 percent) and Japan (up 150 percent).
	Crestor sales in the Rest of World were up 35 percent in the first half to $920 million.
	US sales of the Toprol-XL product range, which includes sales of the authorised generic, were down 79 percent in the second quarter to $71 million. Generic products accounted for 88 percent of dispensed prescriptions in the second quarter.
	Sales of Seloken in other markets in the second quarter were up 1 percent, to $135 million, as growth in China and other Emerging Markets was able to more than offset the decline in Western Europe.
	Atacand sales in the second quarter were up 10 percent in the US. Sales in the Rest of World were up 11 percent on a 30 percent increase in Emerging Markets.

Respiratory and Inflammation

	Second Quarter		CER %	Half Year		CER %
	2008 $m	2007 $m		2008 $m	2007 $m
Symbicort	518	414	+12	989	768	+16
Pulmicort	383	320	+14	794	721	+6
Rhinocort	92	95	-8	172	187	-12
Accolate	19	19	-5	37	38	-5
Oxis	21	23	-22	38	46	-28
Total	1,078	911	+9	2,118	1,842	+7

	Symbicort sales in the US were $57 million in the second quarter. Key metrics tracking the progress of the launch continue to show steady improvements. Trial rates among target specialists is now approaching 80 percent; these specialists are starting 27 percent of patients new to combination therapy on Symbicort. The trial rate among primary care physicians has increased to 34 percent, and primary care physicians are now using Symbicort in one out of six patients newly starting combination therapy. Overall, Symbicort share of new prescriptions for fixed combinations reached 9.1 percent in the week ending 18 July; market share among patients newly starting combination treatment has increased to 17.6 percent.
	Symbicort sales in other markets were $461 million, 6 percent ahead of the second quarter last year. A 29 percent increase in Emerging Markets accounts for more than half of the sales growth.
	US sales for Pulmicort were up 24 percent to $251 million in the second quarter.  Pulmicort Respules sales were up 20 percent, with volume growth and price realisation contributing equally to the sales increase.
	On 30 June, Ivax Pharmaceuticals (IVAX) (now known as Teva Pharmaceutical Industries Ltd.), filed a motion for summary judgement of no infringement of AstraZeneca's patents covering Pulmicort Respules. AstraZeneca will oppose the motion. A hearing on the motion has been scheduled for 23 September 2008.
	Sales of Pulmicort in the Rest of World in the second quarter were down 2 percent to $132 million.

Oncology

	Second Quarter		CER %	Half Year		CER %
	2008 $m	2007 $m		2008 $m	2007 $m
Arimidex	490	430	+6	920	831	+4
Casodex	358	331	-2	674	641	-4
Zoladex	310	275	+1	565	524	-2
Iressa	67	61	-	125	113	+2
Faslodex	65	53	+11	121	102	+10
Nolvadex	24	20	+5	42	39	-5
Ethyol *	6	8	n/m	20	8	n/m
Total	1,338	1,195	+2	2,503	2,291	+1

*	Sales of this MedImmune product were consolidated in AstraZeneca accounts from 1 June 2007. As a result, the prior period reflects one month's sales.

	In the US, sales of Arimidex were up 13 percent in both the second quarter and first half. Total prescriptions increased by 1.1 percent year on year in the first half in what was essentially an unchanged total market for hormonal treatments for breast cancer.
	Arimidex sales in other markets were up 1 percent in the second quarter and were down 2 percent for the first half.
	Casodex sales in the second quarter were up 4 percent in the US and were down 4 percent in other markets.
	Worldwide sales of Iressa were unchanged in the second quarter, as a small increase in sales in Emerging Asian markets offset a small decline in Japan.
	The 11 percent increase in second quarter Faslodex sales is primarily a result of a 19 percent increase in Rest of World. Sales in the US were up 4 percent.

Neuroscience

	Second Quarter		CER %	Half Year		CER %
	2008 $m	2007 $m		2008 $m	2007 $m
Seroquel	1,112	963	+11	2,162	1,886	+10
Zomig	114	106	-1	221	213	-4
Total	1,488	1,293	+9	2,866	2,520	+8

	In the US, Seroquel sales were up 8 percent to $733 million in the second quarter. Total prescriptions were up 6.4 percent in the quarter, with 40 percent of the growth attributable to Seroquel XR.  Seroquel is the market leading antipsychotic, with a total prescription share of 31.6 percent in June 2008.
	Seroquel sales in other markets increased by 18 percent to $379 million in the second quarter, with sales in Established Markets up 20 percent.
	Once the regulatory filing in the European Union seeking approval for Seroquel XR for use in generalised anxiety disorder is accomplished in the fourth quarter 2008, then all the major life cycle management filings for Seroquel XR will be complete, and commercial launches should commence in late 2008 and into 2009.
	Sales of Zomig in the second quarter were up 10 percent in the US and were down 8 percent in other markets.

Infection and Other

	Second Quarter		CER %	Half Year		CER %
	2008 $m	2007 $m		2008 $m	2007 $m
Synagis*	81	16	n/m	600	16	n/m
Merrem	226	194	+7	439	372	+9
FluMist*	-	-	n/m	-	-	n/m
Total	365	276	+25	1,152	528	+111

*	Sales of these MedImmune products were consolidated in AstraZeneca accounts from 1 June 2007. As a result, the prior period reflects one month's sales.

Synagis sales, which have a pronounced seasonal pattern, were only $81 million in the quarter, with modest sales in the second and third quarters of the year.

Geographic Sales

	Second Quarter		CER %	Half Year		CER %
	2008 $m	2007 $m		2008 $m	2007 $m
North America	3,463	3,542	-3	7,186	7,030	+1
US	3,126	3,268	-4	6,527	6,502	-
Established ROW*	3,340	2,842	+2	6,313	5,506	+2
Emerging ROW	1,153	889	+20	2,134	1,703	+16

*	Established ROW comprises Western Europe (including France, UK, Germany, Italy, Sweden, and others), Japan, Australia and New Zealand.

	In the US, sales were down 4 percent in the second quarter resulting from the loss of $268 million of Toprol-XL sales to generic competition. Excluding Toprol-XL, sales increased by 4 percent in the US. Second quarter sales include approximately $100 million of inventory build in the quarter.
	Sales in the Established Rest of World segment were up 2 percent in the second quarter. Sales in Western Europe were up 1 percent, as growth in Crestor, Seroquel and the inclusion of Synagis sales more than offset declines in Losec, Casodex and Pulmicort. Sales in Japan were up 10 percent, a rebound from the soft first quarter result that preceded the implementation of the biennial price reductions in April.
	Sales in Emerging Markets were up 20 percent in the second quarter. This marks the first time sales in Emerging Markets exceeded $1 billion in a quarter. The key contributors to sales growth were Cardiovascular products, Nexium and the Respiratory portfolio. Sales in China were up 29 percent.

Operating and Financial Review

All narrative in this section refers to growth rates at constant exchange rates (CER) unless otherwise indicated

Second Quarter  

All financial figures, except earnings per share, are in $ millions. Weighted average shares in millions.

	Reported 2008	Restructuring and Synergy Costs	MedImmune Amortisation	Ethyol Impairment	Merck Amortisation	Core  2008	Core 2007	Actual %	CER %
Sales	7,956	-	-	-	-	7,956	7,273	9	2
Cost of Sales	(1,455)	24	-	-	-	(1,431)	(1,469)
Gross Margin	6,501	24	-	-	-	6,525	5,804	13	4
% sales	81.7%					82.0%	79.8%	+2.2	+1.7
Distribution	(75)	-	-	-	-	(75)	(61)	22	14
% sales	0.9%					0.9%	0.8%	-0.1	-0.1
R&D	(1,297)	32	-	-	-	(1,265)	(1,196)	6	-
% sales	16.3%					15.9%	16.5%	+0.6	+0.3
SG&A	(2,834)	75	77	-	26	(2,656)	(2,397)	11	5
% sales	35.6%					33.4%	33.0%	-0.4	-0.9
Other Income	178	-	30	-	-	208	259	(20)	(19)
% sales	2.2%					2.6%	3.6%	-1.0	-0.7
Operating Profit	2,473	131	107	-	26	2,737	2,409	14	3
% sales	31.1%					34.4%	33.1%	+1.3	+0.3
Net Finance (Expense)/Income	(194)	-	-	-	-	(194)	18
Profit before Tax	2,279	131	107	-	26	2,543	2,427	5	(6)
Taxation	(651)	(37)	(31)	-	-	(719)	(669)
Profit after Tax	1,628	94	76	-	26	1,824	1,758	4	(7)
Minority Interests	(8)	-	-	-	-	(8)	(11)
Net Profit	1,620	94	76	-	26	1,816	1,747	4	(7)
Weighted Average Shares	1,456	1,456	1,456	-	1,456	1,456	1,503
Earnings per Share	1.11	0.06	0.06	-	0.02	1.25	1.17	7	(4)

Sales increased by 9 percent on a reported basis and by 2 percent on a constant currency basis. Currency movements increased sales by 7 percent.  

Core gross margin of 82.0 percent in the second quarter was 1.7 percentage points higher than last year. Principal contributors were lower payments to Merck (1.3 percentage points), continued efficiency gains and mix effects (0.7 percentage points) with partial offset from higher royalty payments (0.3 percentage points).

Core R&D expenditure was $1,265 million in the second quarter, level with last year as a result of good progress on the delivery of R&D productivity initiatives, restructuring benefits and portfolio changes.  

Core SG&A costs of $2,656 million were 5 percent higher than the second quarter of 2007 due to the inclusion of MedImmune, increased investment in our Emerging Markets and some higher legal expenses.

Core other income of $208 million was $51 million lower than the second quarter in 2007. Included within the current year period were gains, totalling $81 million, realised from the disposal of non-core products in Scandinavia. This amount was $58 million lower than that recognised on the disposal of non-core Infection products in the second quarter of 2007. The inclusion of a full quarter of MedImmune other income broadly matched lower other one-time gains and royalty income.

Core operating profit was $2,737 million, an increase of 3 percent at CER or up 14 percent on an as reported basis. Currency movements increased operating profit by 11 percent. In comparison with last year, the dollar was 14 percent weaker against the euro (increasing sales and costs), 13 percent weaker against the Swedish krona (increasing costs), but 1 percent stronger than sterling (slightly reducing costs).  On a constant currency basis, Core operating margin increased by 0.3 percentage points to 34.4 percent of sales, chiefly a result of improvements in gross margin and efficiencies in R&D with partial offset from higher SG&A costs and lower other income.

Core earnings per share in the second quarter were $1.25, a CER decrease of 4 percent, as the increase in Core operating profit and the benefit of a lower number of shares in issue was more than offset by increased net interest expense. Core earnings per share on an as reported basis increased 7 percent. 

Reported operating profit was up 12 percent to $2,473 million, as restructuring and synergy costs in the current quarter were $245 million lower than those incurred in the second quarter 2007, partially counterbalanced by 3 months of MedImmune-related amortisation expense this quarter that was $72 million higher than the one month's cost incurred in the second quarter last year. Reported earnings per share were $1.11.

First Half

All financial figures in table, except earnings per share, are in $ millions. Weighted average shares in millions.

	Reported 2008	Restructuring and Synergy Costs	MedImmune Amortisation	Ethyol Impairment	Merck Amortisation	Core  2008	Core 2007	Actual %	CER %
Sales	15,633	-	-	-	-	15,633	14,239	10	3
Cost of Sales	(2,957)	56	-	-	-	(2,901)	(2,873)
Gross Margin	12,676	56	-	-	-	12,732	11,366	12	5
% sales	81.1%					81.5%	79.8%	+1.7	+1.2
Distribution	(141)	-	-	-	-	(141)	(122)	15	8
% sales	0.9%					0.9%	0.9%	-	-
R&D	(2,533)	86	-	-	-	(2,447)	(2,366)	3	(1)
% sales	16.2%					15.7%	16.6%	+0.9	+0.7
SG&A	(5,571)	106	156	257	51	(5,001)	(4,592)	9	3
% sales	35.6%					32.0%	32.2%	+0.2	-0.1
Other Income	299	-	60	-	-	359	397	(10)	(10)
% sales	1.9%					2.3%	2.8%	-0.5	-0.4
Operating Profit	4,730	248	216	257	51	5,502	4,683	17	7
% sales	30.3%					35.2%	32.9%	+2.3	+1.4
Net Finance (Expense)/Income	(308)	-	-	-	-	(308)	115
Profit before Tax	4,422	248	216	257	51	5,194	4,798	8	(2)
Taxation	(1,289)	(72)	(63)	(77)	-	(1,501)	(1,397)
Profit after Tax	3,133	176	153	180	51	3,693	3,401	9	(1)
Minority Interests	(10)	-	-	-	-	(10)	(15)
Net Profit	3,123	176	153	180	51	3,683	3,386	9	(1)
Weighted Average Shares	1,456	1,456	1,456	1,456	1,456	1,456	1,515
Earnings per Share	2.14	0.12	0.11	0.12	0.04	2.53	2.24	13	3

Sales increased by 10 percent on a reported basis and by 3 percent on a constant currency basis. Currency movements increased sales by 7 percent. 

Core gross margin of 81.5 percent in the first half was 1.2 percentage points higher than last year. Principal drivers were lower payments to Merck (1.3 percentage points), continued efficiency gains and mix effects factors (0.8 percentage points), partially offset by higher royalty payments (0.9 percentage points).

Core R&D costs of $2,447 million were down 1 percent over last year. The prior period included intangible asset impairment charges relating to the collaborations with AtheroGenics and Avanir. Excluding these impairments, Core R&D expenditure was up 2 percent in the first half, with the inclusion of MedImmune expense being largely offset by improved productivity and efficiency, restructuring benefits and portfolio changes.

Core SG&A costs of $5,001 million were 3 percent higher than the first half of 2007 due to the inclusion of MedImmune and increased investment in our Emerging Markets.

Core other income of $359 million was $38 million below last year with expected lower one-time gains and royalty income being only partially offset by MedImmune's licensing and royalty income streams.

Core operating profit of $5,502 million was up 7 percent at CER or 17 percent on an as reported basis. Currency movements increased operating profit by 10 percent. On a constant currency basis, Core operating margin increased by 1.4 percentage points to 35.2 percent of sales as a result of improvements in gross margin and R&D efficiencies more than compensating for lower other operating income and higher SG&A costs.

Core earnings per share in the first half were $2.53, an increase of 3 percent at CER, as the increase in Core operating profit and the benefit of a lower number of shares outstanding was partially offset by increased net interest expense. Core earnings per share on a reported basis increased 13 percent.

Reported operating profit of $4,730 million was up 3 percent, against 7 percent on a Core basis. This was a result of the first quarter Ethyol impairment charge and six months of MedImmune-related amortisation, versus the one month charge incurred in the first half last year, being only partially offset by lower restructuring and synergy costs in the first half of 2008.

Reported earnings per share in the first half were $2.14, a decrease of 3 percent at CER. Including the currency benefit, Reported earnings per share increased 9 percent.

Finance Income and Expense

Net finance expense was $308 million for the first half ($194 million for quarter two), versus income of $115 million in the first half of 2007 ($18 million income for quarter two 2007). Key drivers are the interest payable on additional borrowings, and reduced interest received on lower average cash holdings, as a result of the acquisition of MedImmune.

Taxation

The effective tax rate for the second quarter is 28.6 percent (2007 27.8 percent) and 29.1 percent for the first half (2007 29.5 percent). For the full year the tax rate is currently anticipated to be around 29.5 percent, the same as for 2007.

Cash Flow

Cash generated from operating activities was $4,292 million in the six months, compared with $3,184 million in 2007. The increase of $1,108 million was principally driven by an increase in operating profit before depreciation, amortisation and impairment costs of $1,011 million, a decrease in tax payments of $367 million, with partial offset from an increase in interest payments of $263 million.

Net cash outflows from investing activities were $3,199 million in the six months compared with $14,493 million in 2007. Stripping out the acquisition of MedImmune in 2007 of $14,391 million, the increase in cash outflow of $3,097 million is due primarily to the payment of $2,630 million to Merck as part of the partial retirement, a reduction in the inflow from the movements in short term investments and fixed deposits of $570 million, and a decrease in interest received of $130 million. 

Cash distributions to shareholders were $2,180 million through the payment of the second interim dividend from 2007 of $2,007 million and net share repurchases of $173 million. 

Investments

As described in note 5, on 17 March, the Company made payments under the provisions of the Merck agreements of approximately $2.6 billion. These have been recorded as intangible assets to reflect the benefits accruing in respect of relief from future contingent payments and the ability to fully exploit our resources and products within certain therapy areas. There were no other significant investments in the six months.

Debt and Capital Structure

As at 30 June 2008, outstanding gross debt (including loans, short-term borrowings and overdrafts) was $14,873 million (31 December: $15,156 million), of which $11,032 million is due after one year (31 December: $10,876 million). Outstanding net debt of $10,359 million has increased by $1,247 million from 31 December, principally as a result of the cash outflows described above.

In addition, during July, the Company issued a further EUR 500 million bond as part of its refinancing programme, the proceeds of which will be used to refinance maturing commercial paper. The bond has a maturity of 18 months, maturing 4 January 2010 with a coupon of 5.625% and was issued under the Euro Medium Term Note Programme.

Dividends and Share Repurchases

The Board's dividend policy is unchanged, and is to grow dividends in line with reported earnings before restructuring and synergy costs. Consistent with this policy, the Board has recommended a first interim dividend for 2008 of $0.55 per Ordinary Share (27.8 pence; SEK 3.34).

During the second quarter, 5.0 million shares were repurchased for cancellation at a total cost of $208 million. There were no share repurchases in the first quarter. During the first six months, 0.9 million shares were issued in consideration of share option exercises and in relation to employee share plans for a total of $35 million.

The total number of shares in issue at 30 June 2008 was 1,453 million.

The Board's distribution policy and its overall financial strategy is to strike a balance between the interests of the business, our shareholders and our financial creditors, whilst maintaining a strong investment grade credit rating. The Board expects to undertake share repurchases in the region of $1 billion in 2008, subject to business needs.

Related Party Transactions

There have been no significant related party transactions in the period.

Calendar

30 October 2008	Announcement of third quarter and nine months 2008 results
29 January 2009	Announcement of fourth quarter and full year 2008 results

David Brennan

Chief Executive Officer

Media Enquiries:	Steve Brown/Chris Sampson (London)	[phone]/5130
	Earl Whipple (Wilmington)	[phone]
	Per Lorentz (Södertälje)	(8) 553 26020
Analyst/Investor Enquiries	Mina Blair/Karl Hard (London)	[phone]/5322
	Jonathan Hunt (London)	[phone]
	Peter Vozzo (MedImmune)	[phone]
	Ed Seage/Jörgen Winroth (US)	[phone]/[phone]

 

END

 

 

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