AstraZeneca 6-K 2007
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Report of Foreign Issuer
to Rule 13a-16 or 15d-16 of
Date of Reports: 28 February 2007
Commission File Number: 001-11960
15 Stanhope Gate, London W1K 1LN, England
INDEX TO EXHIBITS
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CHIEF EXECUTIVE OFFICERS REVIEW
AstraZeneca is a successful, research-based, prescription pharmaceutical business. We bring benefit for patients and add value for our shareholders and wider society through innovation and the responsible delivery of medicines in important areas of healthcare.
The demand for healthcare continues to grow. People are living longer, populations are increasing and the emergence of new economies means that the number of patients who can benefit from medicines is expanding. At the same time, many diseases remain under-diagnosed, sub-optimally treated or do not have effective therapies. Alongside these significant opportunities for AstraZeneca to make a difference, we face some tough challenges including growing pressure on the price of our marketed products, higher costs and regulatory hurdles for the development of new ones and an increasingly competitive marketplace, including earlier challenges to our patents.
Our strategy for achieving sustained, industry-leading growth within this environment centres on three key priorities:
PATIENTS, PRODUCTS, PEOPLE
To bring the most benefit for patients and those who treat them, we must continue to understand what makes a difference for them and apply that insight across all of our activities to ensure we remain targeted on their changing needs. For the future, we recognise that sustainable long-term success depends on further strengthening the flow of new products whether from our own laboratories or from outside AstraZeneca. The continued commitment and energy of our people is vital, and we aim to provide the leadership and support they need to deliver their best contribution to achieving our business goals. By keeping our promises in all aspects of our business, and effectively managing the associated opportunities and risks, we aim to drive a performance that will place us among the best in the industry.
OUR YEAR IN BRIEF
With sales of $1.5 billion, up 29% from last year, Arimidex is now the leading hormonal breast cancer therapy in the US, Japan and France. This continued growth is largely based on results from the ATAC study, which showed Arimidex to be superior to tamoxifen in the five years after surgery, when the risk
CHIEF EXECUTIVE OFFICERS REVIEW
of the cancer recurring is at its highest. In June, following approval through mutual recognition for a new use, many patients in Europe currently receiving tamoxifen can now be switched to Arimidex.
Crestor, our highly effective treatment for managing cholesterol levels, achieved sales of over $2 billion, an increase of 59% over last year. Data from two clinical studies (ORION in 2005 and ASTEROID in 2006) demonstrated strong potential for Crestor in the treatment of atherosclerosis. The METEOR study has also now been completed, and the results will be presented in March 2007. The METEOR study forms the basis of a submission for an atherosclerosis label made to the Food and Drug Administration (FDA) and in the EU through the Mutual Recognition Procedure in January 2007. ASTEROID and ORION were included in the submission as supportive studies.
Nexium, our treatment for acid-related diseases, achieved sales of $5.2 billion. During the year, we gained approval for the additional use of Nexium in children aged 12-17 years with gastro-oesophageal reflux disease, and for a new use in treating patients with the rare gastric acid disorder, Zollinger Ellison Syndrome.
Seroquel, with sales of $3.4 billion, further strengthened its position as the market-leading atypical anti-psychotic therapy in the US and continued to grow strongly elsewhere. Already used for the treatment of schizophrenia and bipolar mania, we gained approval during the year in the US for its use in bipolar depression. Seroquel is the first and only single agent medication approved for both mania and depression in bipolar disorder.
In December the European Patent Office ruled that one of the European substance patents for Nexium would be rejected. Both Nexium and Seroquel continue to be the subject of patent litigation in the US
following the filing of Abbreviated New Drug Applications in 2005 and 2006. AstraZeneca continues to have confidence in the intellectual property portfolio protecting Nexium and Seroquel and will defend and enforce its intellectual property rights protecting both products.
Symbicort achieved global sales of $1.2 billion in 2006, up 18%. During the year it was approved in the US in a pressurised Metered Dose Inhaler for maintenance treatment of asthma in patients aged 12 years and above. We continue to plan for a US launch for Symbicort around the middle of 2007, although achieving this launch timeline is dependent upon successful transfer of technology from development to manufacturing and completion of validation batches. In addition, Symbicort SMART was approved for use in adults through the EU Mutual Recognition Procedure.
You can read more about our product performance in other sections of this report.
In our markets
As we continue to focus on managing such challenges and building on our leading positions in established markets, we are also increasing our strength in fast-developing markets, such as China. During the year, we announced a $100 million R&D investment
over the next three years in China, which reflects our commitment to building our presence in this important market. As part of this, I was pleased to hold in 2006 the first AstraZeneca Senior Executive Team meeting in that country.
Strengthening our pipeline
Enhancing in-house discovery
The results of our drive to improve productivity are reflected in the sustained size of the early development portfolio. During 2006, 21 candidate drugs were selected for development (compared with 25 in 2005 and 18 in 2004). We have a number of compounds in the later stages of development including Zactima and Recentin
(formerly AZD2171) for treating cancer, and AGI-1067 and AZD6140 for cardiovascular disease.
Accessing external innovation
Building our biopharmaceuticals presence
own expertise in small molecule science, and provide a foundation for building a future pipeline of new products from both areas of research. We anticipate that from 2010 onwards, one in four AstraZeneca candidate drugs eligible for full development will be biologicals.
These efforts will strengthen our long-term sustainability and help us to withstand the impact of some of the setbacks that we experienced with our pipeline this year. In February 2006, we withdrew our anti-coagulant, Exanta, from the market and halted its development on patient safety grounds. We also stopped late-stage development of Galida, our potential diabetes therapy, and NXY-059, a potential treatment for stroke, because they were not demonstrating sufficient patient benefit. Whilst such decisions are disappointing to make, they are an indication of the challenges associated with delivering a new medicine and reflect our commitment to patient safety and to maintaining a portfolio of only the highest quality, highest potential candidates.
Throughout all of these activities, maintaining our fundamental commitment to corporate responsibility (CR) remains a top priority. More information about our CR commitment, policies and performance in this area is available in our separate Corporate Responsibility Summary Report 2006 or on our website.
THE PEOPLE OF ASTRAZENECA
Strengthening the pipeline remains our top priority. However, we will also continue to challenge all elements of our business to drive productivity and provide for the increased investment to support achievement of our strategic objectives. As part of this, in February 2007, we announced further plans to improve the efficiency and effectiveness of our supply organisation, which will involve reductions to the workforce. Decisions such as these are not taken lightly and I am very aware of the impact this will have on the people affected and the communities in which we operate. The reductions will be the subject of a full consultation process with works councils, trade unions and other employee representatives, and in accordance with local labour laws, to ensure the process is fair and transparent.
I am confident that, with strong leadership, clear direction and a sense of urgency around delivery, we have a sound platform for continued success. Above all, my aim is to deliver sustained, profitable and responsibly managed growth while ensuring that AstraZeneca continues to make a valuable contribution to global healthcare.
DAVID R BRENNAN
following approval for a new use, patients in Europe currently receiving tamoxifen can now be switched to Arimidex.
The main symptoms of gastro-oesophageal reflux disease (GERD), often called heartburn or acid reflux, can significantly affect the sufferers quality of life. Left untreated, the disease can cause more serious problems such as stomach ulcers or cancer of the oesophagus. Our range includes two proton pump inhibitors that work on the cells in the stomach that make acid, to reduce the amount of acid produced and released into the stomach. We introduced the worlds first proton pump inhibitor, Losec/Prilosec, in 1988, and have since developed an improved therapy, Nexium. Launched in 2000, Nexium provides healing and symptom relief in more patients and in a shorter period of time than its leading competitors (including our original therapy). During 2006, we broadened the use of Nexium with approval in the US for its additional use in children with GERD aged 12-17 years, and in the EU, US and Australia it was approved for a new use in treating patients with the rare gastric acid disorder, Zollinger Ellison Syndrome.
Improved healthcare means treating the causes of illness as well as the symptoms. Our range includes Crestor, a statin for controlling levels of cholesterol that can contribute to heart disease. Although there are other statins on the market, Crestor is increasingly recognised as being particularly valuable for high-risk patients because of its powerful effect in lowering low-density (bad cholesterol) and raising high-density (good cholesterol) lipids.
IMPROVING OUR ABILITY TO TARGET INDIVIDUAL NEEDS
Our work also focuses on areas where treatment options are limited and medical needs are not being adequately met. When launched in 2002, Iressa was the first in a new class of targeted anti-cancer drugs to be approved for the treatment of advanced non-small cell lung cancer (NSCLC). Those patients who benefit from Iressa tend to do so quickly and sometimes results are dramatic.
In 2004, the results of a study in advanced NSCLC patients for whom chemotherapy had not worked, showed some improvement in survival. Whilst the results were not statistically significant for the overall study population, they did confirm a number of clinical benefits of Iressa, including tumour shrinkage, and showed a significant increase in survival in patients of Asian ethnicity and in patients who had never smoked.
Following the study, AstraZeneca voluntarily withdrew the European submission for Iressa and regulatory authorities in the US and Canada restricted the use of Iressa to those patients already benefiting from the drug. In the Asia Pacific region, due to the ethnic differences in lung cancer, Iressa has become an established therapy for pre-treated advanced NSCLC. Progress continues to be made in identifying which patients, in which treatment settings, are most likely to benefit from Iressa. In 2006, the results of a study in a Japanese patient population failed to demonstrate statistical non-inferiority of Iressa for overall survival. However, we do not believe this alters the benefit/risk profile of Iressa in pre-treated Japanese NSCLC patients.
LISTENING AND LEARNING
Understanding the needs of patients and healthcare professionals, and the attitudes of regulators and those who pay for healthcare, is critical to our continued success. We work closely with these groups across all our activities to gain the insight we need to maintain a flow of new, targeted medicines that make a difference for patients and our other stakeholders.
As part of this, we continuously talk to patients and their physicians to understand what they need and want. This includes working with, and supporting patient groups who represent the particular demands of specific health issues, as well as discussing with healthcare professionals the broader range of disease challenges they and their patients face.
We also talk to patients and physicians about what more we can do to help them manage the healthcare challenges, beyond the provision of effective medicines.
For example, people being treated for high cholesterol sometimes find the treatment goals too hard to reach, particularly as their condition does not make them feel unwell. So patients may give up before achieving their goals if they do not get rapid results from a medication. We have therefore re-shaped our communications to address the patients emotional as well as medical needs.
By including information about how quickly Crestor can have an effect, we hope to help to encourage people to stay with their treatment and reach their cholesterol targets.
In a different approach to helping patients keep up with their treatment, a small localised trial was recently conducted to assess the use of mobile phone technology and text messaging to remind patients to take their medication. The pilot focused on Seroquel because schizophrenia is a condition where outcomes are critically affected by the levels of treatment adherence. Patients found the text reminders useful in helping them to follow a regular regime and healthcare professionals welcomed the idea. Further trials are underway or planned to further evaluate the system.
CONTINUOUS FOCUS ON PATIENT SAFETY
The safety of the patients who take our medicines is a fundamental consideration throughout all of our activities. Ideally, a medicine would target only the disease that it is meant to treat and would not have any other effect. In reality, however, despite the best efforts of scientists, such a medicine does not yet exist and all medicines have possible side effects that some patients might experience. Healthcare professionals, in consultation with their patients, must therefore weigh the benefits of a medicine against its possible side effects and decide the acceptable level of risk.
We aim to minimise the risks and maximise the benefits of each of our medicines throughout their life-cycles. In discovery research, where we investigate thousands of compounds for their potential to become a new medicine, only a small number succeed because of the demanding criteria of our selection process, which centres on safety and how the medicine works. During the
MY NUMBER ONE PRIORITY IS TO DELIVER A STREAM OF MEDICINES THAT MEET UNMET PATIENT NEEDS. TO ACHIEVE THIS, WE MUST HAVE AN ORGANISATION THAT IS FIT FOR PURPOSE AND CAPABLE OF DISCOVERING AND DEVELOPING BETTER MEDICINES WITH A VERY STRONG EMPHASIS ON QUALITY AND SAFETY. IN OUR COMPETITIVE WORLD, SPEED IS ALSO VITAL.
IN THE SHORT TERM, OUR BUSINESS NEEDS WILL BE MET THROUGH LIFE-CYCLE MANAGEMENT AND DELIVERY OF OUR PHASE III PROGRAMMES.
IN THE MID-TERM, WE LOOK TO DRIVE OUR PHASE I, PHASE II AND PRE-CLINICAL PROJECTS TOWARDS PROOF OF CONCEPT AND PROOF OF PRINCIPLE AS RAPIDLY AS POSSIBLE, WHILST RECOGNISING THAT WE NEED TO CONTINUE TO ACCESS THE ENORMOUS WORLD OF EXTERNAL SCIENCE.
IN THE LONG TERM, IN ADDITION TO OUR CURRENT CAPABILITIES, WERE ALSO SEEKING TO TRANSFORM ASTRAZENECA THROUGH THE USE OF NOVEL BIOMARKERS AND IMAGING AS WELL AS A STRATEGIC MOVE INTO BIOLOGICALS TO BUILD A MAJOR PRESENCE IN THE FAST-GROWING BIOPHARMACEUTICALS SECTOR.
JOHN PATTERSON FRCP
Bringing a new medicine to market is a long, complex, expensive and risky process. It can take 8-12 years of discovery and development involving highly skilled scientists and state-of-the-art equipment, facilities and technologies. Many thousands of compounds are investigated to identify those with the highest potential to become a new medicine. Very few will make it to market because of the demanding criteria we, and our regulators, set for success. Typically, over $800 million is invested in a new medicine before the first dollar of sales is realised.
We have a global research organisation, with around 12,000 people at 16 major centres in eight countries dedicated to the discovery and development of new products that make a difference. In drug discovery, we use leading-edge science and technologies to identify new compounds with high potential as new medicines. In development, we focus on developing better medicines faster. All our scientists work across global and organisational boundaries to share experience, promote best practice and maximise the scientific potential that our size and global reach offer.
FOCUSED ON CONTINUOUS IMPROVEMENT
During 2006, we also reviewed our disease target areas and re-focused our efforts, to ensure our scientific resources are best
The results of our drive to improve productivity are reflected in the growth of our early development portfolio. During 2006, 21 candidate drugs were selected (compared to 25 in 2005 and 18 in 2004). We have a number of compounds in the later stages of development including Zactima and Recentin (formerly AZD2171) for treating cancer, and AGI-1067 and AZD6140 for cardiovascular disease. Details of all the compounds in our pipeline are provided in the table on pages 18 and 19.
In todays world of rapid scientific progress, no single company can rely exclusively on its own discovery and development and we seek to strengthen our internal capabilities through acquisitions and alliances with external partners whose skills and resources complement our own. We have more than 1,850 R&D collaborations and agreements in place that broaden our base for disease research.
In 2006, we stepped up the pace. We continuously monitor new and emerging sciences for opportunities that will help us to develop the next generation of medicines that offer better results for patients.
One such opportunity is biopharmaceuticals medicines derived from biological molecules, which are usually produced naturally by living organisms in response to disease, for example antibodies. New technologies have opened up the possibility of imitating and improving on the natural response, where it is not itself being effective.
In line with our strategic aim of building a major presence in this fast-growing area, and building on a successful alliance, during 2006 we acquired Cambridge Antibody Technology Group plc (CAT) a leading UK-based biotechnology company. CATs skills in biological therapeutics complement our own expertise and strength in small- molecule science, and provide a foundation for building a future pipeline of new products from both areas of research. We anticipate that from 2010 onwards, one in four AstraZeneca candidate drugs eligible for full development will be biologicals.
Other significant transactions during the year included the alliance with Schering AG to co-develop and jointly commercialise a novel breast cancer treatment and the collaboration with Abbott to co-develop and market a combination treatment for cholesterol. In January 2007, we also announced a worldwide collaboration with Bristol-Myers Squibb Company to develop and commercialise two investigational compounds being studied for the treatment of Type 2 diabetes.
Formed in 2006, our new Strategic Planning and Business Development organisation (SPBD) is designed to further improve the focus, co-ordination and execution of our externalisation activity, specifically the accessing of external research and development technologies, products and collaborations.
TARGETING THE NEEDS
We work across functional boundaries within the Company to ensure that we maintain the quality of our portfolio by effectively prioritising the emerging research opportunities, developing these to meet market needs and maximising the potential of our marketed brands.
To guide our activity, we define at an early stage what we believe the profile of a medicine needs to be to work most effectively in combating a particular disease. These disease target product profiles (TPPs) are based on our insight into the needs of patients and others for whom a medicine must do its job, including prescribers and those who pay for healthcare.
When we identify a compound with high potential to become a new medicine, we create a TPP specifically for that candidate drug (CD). This profile is then used throughout the CDs development, and beyond, to measure its progress against the criteria we, and our regulators, have set for it. This enables us to prioritise our further investments across the full range of CDs in our product pipeline and maintain a focus on those that are most likely to succeed as innovative new medicines.
During 2006, we stopped the development of two products in our pipeline because they failed to meet their TPPs, namely a potential new diabetes therapy and a treatment for stroke. Whilst disappointing to make, decisions such as these are an indication of the challenges associated with delivering a new medicine, and reflect our commitment to maintaining a portfolio of only the highest quality, highest potential candidates.
In the highly competitive environment in which we work, driving top performance of our products in the marketplace is critical to our success. In the short to medium term, our growth is being driven by five key products, launched over the last 12 years, which provide the platform for our continued success whilst we build for the future through improved internal productivity and accessing external innovation potential.
In 2006, these five growth drivers (Arimidex, Crestor, Nexium, Seroquel and Symbicort) together delivered sales of $13.3 billion, up 23% from last year, and overall sales of all our products, including our successful mature brands such as Zoladex, Seloken/Toprol-XL, Casodex, Zomig and Merrem, totalled $26.5 billion (up 11%). The individual performance of each of our biggest selling brands is shown on page 13.
THINKING GLOBALLY, ACTING LOCALLY
Active in over 100 countries, we have an extensive worldwide sales and marketing network dedicated to building strong relationships in local markets and responding quickly and effectively to our customers changing needs. We sell mostly through our own national companies and our products are marketed mainly to doctors and other healthcare professionals. This starts with face-to-face contact with our sales representatives still the single most effective marketing method.
BRINGING ECONOMIC BENEFITS
Our medicines offer economic advantages as well as therapeutic benefits, and in our discussions with those who pay for healthcare, we include explanation of these advantages to ensure the full value of our medicines is understood. This requires investment, throughout the development of a medicine, in studies to demonstrate cost-effectiveness, cost-benefit and outcomes (such as survival and quality of life improvements) in addition to traditional studies designed to establish safety and efficacy.
Effective treatments can help to save healthcare costs by reducing the need for more expensive care, such as hospital stays or surgery. For example, a 2002 study in the US found that for each additional $1 spent on newer medicines, $6.17 could be saved on total healthcare expenditure (including a saving of $4.44 in hospital costs)*.
There are productivity benefits too. The use of innovative medicines that reduce the incidence of disease, or enable better disease management, means less time off work or away from school or other daily activities helping patients to lead normal, productive lives.
As well as our products, our business activities in general also contribute to the economic development of the communities in which we operate, through local employment and wages, taxes, community support and the purchase of materials and services that are sourced locally and nationally. We are beginning to contribute in a similar way as we expand our presence in emerging economies through investment in facilities, collaborations with local partners and clinical trial programmes as well as employing people from the local community.
OUR PRODUCT RANGE
OUR DEVELOPMENT PIPELINE
As disclosure of compound information is balanced by the business need to maintain confidentiality, information in relation to some compounds listed here has not been disclosed at this time.
We also use a two-yearly, global, web-based survey to track levels of employee engagement and identify areas that need more attention. In 2006, we conducted our fourth such survey, which generated the highest response rate to date (86%), reflecting peoples continued confidence in it as a trusted feedback mechanism. The scores, which were widely communicated to employees, improved across all categories compared with the last survey in 2004 and exceeded the pharmaceutical industry benchmark in most cases. Areas of positive feedback included employee health, safety, information sharing and communication (in particular, immediate managers being more open to feedback). Our people rate the Company highly on the ethical standards that are applied to its external dealings. Overall, engagement levels are strong, but the survey highlighted the need for further improvement in some aspects of leadership and performance management. Initiatives focused on these areas have already begun including increased clarity on accountabilities being integrated into management frameworks.
Diversity was also a feature of the survey. Results showed that, overall, 63% of our staff
believe that management supports equal opportunity for all employees above the Global High Performance Norm, and 69% of women and 70% of men said they had not encountered any bias or discrimination towards themselves or others in AstraZeneca. The survey results also included a functional and geographic breakdown of these overall figures, which has enabled us to identify areas where further improvements are needed.
PROMOTING A SAFE, HEALTHY WORKPLACE
Providing a safe workplace and promoting the health and wellbeing of all our people has always been a core priority for AstraZeneca. As we continue to expand and change our activities, we are strengthening and adjusting our commitment, building on our traditional programmes that focus on workplace behaviours and attitudes, coupled with new approaches to managing stress and helping employees understand their personal health risks.
At the start of 2006, we introduced new Company-wide objectives and associated targets for 2010 for safety, health and wellbeing that aim to drive continuous improvement in our performance. Our new key performance indicator (KPI) for safety, health and wellbeing combines the frequency rates for accidents resulting in fatal and serious injuries and new cases of occupational illness into one KPI, with an overall target of a 50% reduction in the combined rates by 2010, compared with a 2001/2002 reference point.
We also encourage and support a healthy work/life balance, which we know is essential to the continued wellbeing of our employees worldwide.
EVERY INTERACTION COUNTS
We believe what we do is important. We also believe how we do it is just as important to our stakeholders and wider society. Only by working responsibly can we earn the trust and confidence that make such a vital contribution to our corporate reputation and our licence to do business.
This means making every interaction, both inside and outside the Company, count towards building our individual and collective trustworthiness.
We are working hard to ensure that our high-level values are translated into consistent and appropriate actions and behaviour worldwide. Backed by our global Corporate Responsibility Policy and performance measures, we continue to drive the integration of corporate responsibility considerations into everyday business thinking throughout the Company.
This includes providing managers with guidance on putting the global standards into practice at a local level, as well as communicating with our employees to ensure their understanding of our commitment and how everyone has a part to play in making sure AstraZeneca continues to be welcomed as a valued member of the global community.
You can read more about our commitment to corporate responsibility and our performance in our separate Corporate Responsibility Summary Report 2006, or on our website.
Our strategy for ensuring that we continue to make our best contribution to healthcare and deliver sustained, industry-leading, responsibly managed growth centres on three key priorities:
Across all of our activities, we will continue to work closely with all our stakeholders to provide medicines that meet patient needs and add value for society, within the scope of our existing therapy areas and beyond.
We have a clear set of objectives for delivering this strategy. Through the professionalism and commitment of our people, we are determined to deliver a performance that will place AstraZeneca among the best in the industry.
The Board and the Senior Executive Team (SET) use a quarterly business performance management (BPM) report to measure our progress in delivering our strategic objectives.
The report provides Board and SET members with shared insight into current progress against short-term non-financial objectives and current year milestones for longer-term strategic goals.
A range of financial and non-financial objectives are set each year. During 2006 the focus was on the following key areas:
During 2006, we reviewed our BPM framework with a view to further enhancing our focus on our strategic objectives, which are now grouped under four areas:
Reputation and governance objectives have been included in all four areas, to reflect the importance of integrating consistent behaviours across all of our business activities.
Shareholder returns have been included in the performance area.
The means of measuring performance in these areas range from quantitative, comparative performance measures to more qualitative, discursive analysis.
Together, they provide the framework for consistently monitoring and reporting our progress towards achieving our objectives and, ultimately, delivering enduring shareholder value.
Specific measures that our Board and SET use when assessing performance in relation to the key areas noted above, or that are otherwise judged to be helpful in enabling shareholders better to understand and evaluate our business, are described and illustrated throughout this Annual Review. Examples include:
As a result of our review of our BPM framework in 2006, we are developing new objectives for 2007 in relation to Patients and People. We will report on these objectives in due course.
The performance measures referred to above are measures of our progress in what we do in the business of delivering successful medicines and, thus, shareholder value. As previously mentioned, we also include reputation and governance objectives within the key areas described above.
In terms of measuring the way we do business, we have a range of key performance indicators (KPIs), by which we measure our progress in important areas of corporate responsibility (CR). Auditing of compliance and external assurance is fundamental to ensuring high standards of ethical behaviour, and compliance is integrated into many of the KPIs used to measure our CR progress. More details about these KPIs and our 2006 performance are provided in the separate Corporate Responsibility Summary Report 2006, or on our website.
We also participate in leading external surveys, such as the Dow Jones Sustainability Indexes, which are important means of evaluating our performance and understanding better the demands of sustainable development.
AstraZeneca is listed in the 2007 Dow Jones Sustainability World Index, used by asset managers globally to guide their socially responsible investment. However, whilst we improved our score, we did not regain the place we lost in 2005 in the European Index (Dow Jones STOXX), where competition for places is increasingly fierce.
The AstraZeneca Code of Conduct (which is available on our website) sets out the high standards we expect from our employees, and with which compliance is mandatory. As part of our commitment under that Code to comply with all applicable laws and codes of practice, we apply all of the principles of good governance in the UK Combined Code on Corporate Governance. We also comply with all of the provisions of the UK Combined Code and our corporate governance practices are generally consistent with the New York Stock Exchanges corporate governance listing standards. Our continuous assurance processes are designed to ensure we effectively monitor our compliance with these standards.
SUMMARY FINANCIAL REVIEW
The purpose of this Summary Financial Review is to provide a balanced and comprehensive analysis, including the key business factors and trends, of the financial performance of the business during 2006, 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.
Over 97% of our sales are made in the prescription pharmaceuticals sector, which tends to be relatively insensitive to general economic circumstances in the short term. It is more directly influenced by medical needs and is generally financed by health insurance schemes or national healthcare budgets.
Over the longer term, the success of our research and development is crucial, and we devote substantial resources to this area. The benefits of this investment emerge over the long term and inherently there is considerable uncertainty as to whether it will generate future products.
Over the five years to the end of 2006, we have achieved a compound annual growth in sales of just over 10% and EPS growth of 17%. We accomplished this whilst facing patent expirations on products whose sales represented almost half our turnover at that time.
We believe that the momentum in sales and profit growth established over the last two years can be maintained through life-cycle opportunities and continued improvement in productivity. Long term, performance will be driven by the delivery of new medicines to the market from within our research pipeline or from external sources.
We use specific measures when assessing our performance in key areas as discussed below. Some of the financial measures use information derived at constant exchange rates (CER), in particular, growth rates in sales and costs, operating profit and, as a consequence, earnings per share. CER removes the effects of currency movements, which allows us to focus on the changes in sales and expenses driven by volume, prices and cost levels relative to the prior period.
Other measures used are not influenced so directly, or indeed at all, by the effects of exchange rates.
RESULTS OF OPERATIONS
All figures are quoted in CER unless otherwise indicated.
Our portfolio now has 11 brands with annual sales of greater than $1 billion. The combined sales of five key growth products (Arimidex, Crestor, Nexium, Seroquel and Symbicort) grew by 23% to $13,318 million and now account for just over 50% of our total sales (up from 45% in 2005).
The Gastrointestinal portfolio grew for the second year in a row, up 4% as Nexium growth more than offset the continuing decline in Losec/Prilosec. Nexium sales increased by 12%. Sales in the US were up 13% to $3,527 million on continued strong volume growth offset by lower price realisation. Nexium sales in other markets increased 10%, as good volume growth in France and Italy helped mitigate the significant price erosion in Germany. Losec sales were down 16% to $1,371 million with declines of 12% in the US and 17% elsewhere.
In Cardiovascular, sales grew by 15%. Crestor sales exceeded $2 billion, up 59%. Sales in the US were up 57% to $1,148 million. Crestor share of new prescriptions in the US statin market was 9.6% in December 2006 (compared with 6.9% at the beginning of 2006). Sales in other markets increased by 61% on good growth in Europe and launch in Japan. Seloken/Toprol-XL sales increased by 3%. US sales growth was restricted to 7% by the launch in November of generic Toprol-XL 25mg and our move to recognising revenue conservatively as prescriptions are written (as opposed to on shipment). The performances of Crestor and Seloken/Toprol-XL more than offset declines in Zestril and Plendil, down by 7% and 24%, respectively.
Respiratory and Inflammation sales increased by 10%. Symbicort sales were the main driver of this growth and increased by 18%. US launch of Symbicort is planned for the middle of 2007, although achieving this launch timeline is dependent upon successful transfer of technology and completion of the required validation batches. Elsewhere in the therapy area, Pulmicort sales rose by 11% whilst Rhinocort sales declined by 7%.
Sales in the Oncology portfolio grew by 12%. Arimidex sales increased by 29%. Casodex sales grew by 9% on strong performances outside the US and Zoladex sales exceeded $1 billion for the second year in a row. Iressa sales fell by 11% as growth in Asia Pacific went some way to offset declines in the US.
Neuroscience sales grew by 16%. Seroquel sales exceeded $3 billion, up 24%. In the US, Seroquel share of new prescriptions in the
anti-psychotic market increased to over 30% in December. Sales in other markets increased by 23%.
In the US, sales were up 16% for the full year. Sales growth for Nexium, Seroquel, Arimidex and Crestor amounted to $1,441 million, whilst there were declines in products such as Prilosec. Adjusting sales to exclude Toprol-XL sales from both 2006 and 2005, growth was 11%.
Revenue from outside the US now accounts for 53% of our sales. In Europe, sales increased by 6% for the full year, with good volume growth partially offset by lower realised prices. Sales for the five key growth products combined grew by 21%. However, performance was hindered in Germany, where doctors have been encouraged to prescribe generics.
Sales in Japan were up 5% as a result of good growth for Casodex and Arimidex, together with the launch of Crestor. Sales in China were up 19% on strong growth in all the major therapeutic areas, particularly Oncology.
OPERATING MARGIN AND RETAINED PROFIT
Operating margin increased by 3.8 percentage points from 27.2% to 31.0% . Excluding the effects of currency and other income, underlying margin increased 2.9 percentage points for the full year.
Gross margin increased by 1.4 percentage points to 79.0% of sales. Slightly lower payments to Merck (4.7% of sales) benefited gross margin by 0.1 percentage points whilst currency and royalties reduced gross margin by 0.3 percentage points. Excluding the prior year costs for the early termination of the MedPointe Zomig US distribution agreement and manufacturing provisions and the 2006 provisions made in respect of Toprol-XL, NXY-059 and manufacturing efficiencies, underlying margin improved by 1.5 percentage points.
Research and development expenditure was up 16% and increased by 0.6 percentage points to 14.7% of sales. Selling, general and administrative cost increases were restricted to a 5% increase over last year, adding 2.0 percentage points to operating margin.
Higher net other income and expense increased operating margin by 1.1 percentage points due principally to higher royalties, plus
gains from the divestment of non-core products in the US and Scandinavia.
The net interest and dividend income increase over 2005 is primarily attributable to higher average investment balances and yields.
The effective tax rate for the twelve months was 29.0% (2005 29.1%) . The decrease compared to 2005 is the net effect of tax benefits arising from a different geographical mix of profits, tax deductions relating to share-based payments and the recognition of deferred tax assets in respect of tax credit carry forwards, offset by an increase in tax provisions principally in relation to global transfer pricing issues.
Earnings per share increased by 34% from $2.91 in 2005 to $3.86 for the current year. We estimate that the share re-purchase scheme has added 6 cents to earnings per share (after taking account of interest income foregone). We estimate that Toprol-XL contributed earnings per share of 50 cents. Excluding Toprol-XL, earnings per share growth would be 36%.
FINANCIAL POSITION, INCLUDING CASH FLOW AND LIQUIDITY
The net book value of our assets increased from $13,691 million to $15,416 million. The net profit was distributed through share repurchases of $4,147 million and dividends of $2,217 million. Share issues amounted to $985 million.
Additions and exchange effects ($1,511 million in total) more than offset depreciation and impairments of $1,003 million and disposals, leading to a $468 million increase in the net book value of property, plant and equipment. The significant increase in the value of goodwill and intangibles was primarily due to the expansion of our externalisation programme, described in more detail below. Inventories fell by just over 7% due to continuation of the work to reduce our inventory levels. Receivables grew $783 million, due to exchange together with increases in trade debtors in the US and UK. There was an underlying increase in payables and provisions of $499 million arising principally from higher payables in the US (due to increased volumes of purchases from Merck), the deferred income from the disposal of non-core products in the US and exchange effects.
SUMMARY FINANCIAL REVIEW CONTINUED
Cash generated from operating activities in the year was $7,693 million, $950 million higher than in 2005. An increase in profit before tax of $1,876 million was offset by a $224 million increase in working capital requirements and a $563 million increase in tax paid.
Cash outflows from investing activities were $272 million in the year compared to $1,182 million in 2005. Excluding funds transferred between long-term deposits and liquid cash, underlying cash flows associated with investing activities were an outflow of $1,392 million in 2006 compared with $691 million in 2005, with the increase due to the acquisition of Cambridge Antibody Technology, KuDOS Pharmaceuticals and other intangible assets as a result of new collaboration deals.
Free cash flow for the year was $6,788
million compared to $6,052 million in 2005.
AND CAPITAL EXPENDITURE
During the year we acquired KuDOS Pharmaceuticals ($206 million to access several oncology products) and Cambridge Antibody Technology ($1,116 million to provide a foundation for building the biologics pipeline). The non-core intangible assets arising from the Humira royalty stream acquired with Cambridge Antibody Technology was subsequently disposed for $661 million.
These acquisitions were complemented by significant major licensing and collaboration agreements, including four major agreements with AtheroGenics (a novel anti-atherosclerotic
The strong financial performance delivered over the past three years has stemmed from good top-line growth and disciplined management of costs. Going forward, we remain committed to maintaining a competitive financial performance during this period, when as well as the industry we face the challenges posed by patent expirations and pricing pressures from government and private sector payers. Strengthening the pipeline, by enhancing the productivity of our internal discovery and development and continued pursuit of external opportunities, remains our number one priority. Alongside this, we will continue to challenge all elements of our business, so as to free up the resources necessary to continue to build a new product pipeline capable of sustaining growth over the long term.
Consistent with this, we have taken a further step in our drive to improve productivity, announcing a programme to improve asset utilisation in our global supply chain. Over the next three years we plan to rationalise production assets, anticipating accounting provisions of approximately $500 million (of which approximately $300 million will be cash) and the reduction of approximately 3,000 positions.
Subject to the factors identified in the introduction, we anticipate that continued sales momentum from our key product franchises should result in sales growth in the high single digits at CER in 2007. Tight management of costs should allow for significant growth in R&D investment whilst producing double digit earnings per share growth. The effects of US Toprol-XL sales and contribution are excluded from these anticipated prospects.
SARBANES-OXLEY ACT SECTION 404
Under section 404 of the US Sarbanes-Oxley Act we are required to report on the effectiveness of our internal control over financial reporting. For the year ending 31 December 2006, we have assessed our internal control over financial reporting as effective. KPMG Audit plc have audited our assessment and issued an unqualified report thereon.
BOARD OF DIRECTORS
BOARD OF DIRECTORS
Details of members of the Board at 31 December 2006 are set out on pages 32 and 33.
BOARD COMPOSITION, PROCESSES AND RESPONSIBILITIES
The Board comprises Executive and Non-Executive Directors. In the view of the Board, the majority of Board members are, for the purposes of the UK Combined Code on Corporate Governance and the corporate governance standards of the New York Stock Exchange, independent Non-Executive Directors.
All Directors are collectively responsible for the success of the Company. However, Executive Directors have direct responsibility for business operations, whereas the Non-Executive Directors have a responsibility to bring independent, objective judgement to bear on Board decisions. This includes constructively challenging management and helping to develop the Companys strategy. The Non-Executive Directors scrutinise the performance of management and have various responsibilities concerning the integrity of financial information, internal controls and risk management. To help maintain a strong executive presence on the Board, in addition to the Executive Directors attending, members of the Senior Executive Team (SET) routinely attend Board meetings on a rotational basis. At the end of every Board meeting, the Companys Non-Executive Directors meet without the Executive Directors present.
There is an established procedure operated by the Nomination Committee for the appointment of new directors to the Board. Appointments are based on the merits of the candidates, who are measured against objective criteria. All of the Directors retire at each Annual General Meeting (AGM) and may offer themselves for re-election by shareholders. The Board reviews annually the status of succession to senior positions, including those at Board level, and ensures it has regular contact with, and access to, succession candidates.
The Board sets the Companys strategy and policies and monitors progress towards meeting its objectives. To this end, it conducts a formal strategy review annually. The Board also assesses whether its obligations to the
Companys shareholders and others are understood and met. This includes regular reviews of the Companys financial performance and critical business issues.
At the December 2006 Board meeting, the Chairman reported to the Board on his conversations with each Non-Executive Director about his or her individual performance and that of the Board as a whole, which took place during the fourth quarter of 2006. The Non-Executive Directors reviewed the performance of the Chief Executive Officer (CEO) and other Executive Directors in their absence. In addition, the Board, under the chairmanship of the Senior Independent Director, reviewed the performance of the Chairman in his absence, during that same December Board meeting.
The Company maintained directors and officers liability insurance cover throughout 2006. In early 2006, the Company entered into a deed of indemnity in favour of each Board member. Under Article 134 of the Companys Articles of Association, the current Directors and officers were already indemnified in accordance with the Companies Act 1985. However, consistent with recent changes to the Companies Act 1985, and in the interests of retaining high quality, skilled individuals, current market practice is for companies to enter into a separate deed of indemnity in favour of each director. As at the date of this report, these deeds of indemnity are still in force and provide that the Company shall indemnify the Directors, to the extent permitted by law and the Companys Articles of Association, in respect of all losses arising out of, or in connection with, the execution of their powers, duties and responsibilities, as directors of the Company or any of its subsidiaries.
The Board held six scheduled meetings and one other meeting in 2006. Five of the Board meetings were held in London, one in Södertälje and one by teleconference.
As reported last year, David Brennan became CEO with effect from 1 January 2006.
At the AGM on 27 April 2006, Dame Bridget Ogilvie, a Non-Executive Director, stepped down from the Board. Dame Bridget served the Company as a Non-Executive Director for nine years and worked as a member of various Board committees including, most
recently, the Audit Committee and the Science Committee.
Professor Dame Nancy Rothwell and John Varley were appointed as Non-Executive Directors with effect from 27 April 2006 and 26 July 2006, respectively.
ELECTION AND RE-ELECTION OF DIRECTORS
All of the Directors will retire under Article 65 of the Companys Articles of Association at the AGM in April 2007. The Notice of AGM will give details of those Directors presenting themselves for election or re-election at the AGM. Sir Peter Bonfield and Erna Möller intend to step down as Directors of the Company at the 2007 AGM.
The current members of the Audit Committee are John Buchanan (Chairman of the Committee), Jane Henney and Michele Hooper. Dame Bridget Ogilvie was also a valued member of the Committee until she stepped down as a Director with effect from 27 April 2006.
The current members of the Remuneration Committee are Sir Peter Bonfield (Chairman of the Committee), John Buchanan, Joe Jiminez, Erna Möller and (since 26 July 2006) John Varley. Sir Peter Bonfield and Erna Möller will step down at the AGM in 2007, and Sir Peters role as Chairman of the Committee will be assumed by John Varley.
The current members of the Nomination Committee are Louis Schweitzer (Chairman of the Committee), Håkan Mogren, Sir Peter Bonfield, Jane Henney and Joe Jiminez.
The current members of the Science Committtee are Jane Henney, Erna Möller, Dame Nancy Rothwell (who succeeded Dame Bridget Ogilvie as Chairman of the Committee after Dame Bridget stepped down during 2006) (all Non-Executive Directors), Jan Lundberg, John Patterson and Christopher Reilly.
UK COMBINED CODE ON CORPORATE GOVERNANCE
The Company is applying all the main and supporting principles of good governance in the Combined Code. The Company is complying with all of the provisions of the Combined Code.
INTERNAL CONTROLS AND MANAGEMENT OF RISK
TURNBULL REPORT GUIDANCE
Underpinning these reviews is an annual letter of assurance process by which responsible managers confirm the adequacy of their systems of internal financial and non-financial controls, their compliance with Company policies and relevant laws and regulations (including the industrys regulatory requirements), and confirm they have reported
any control weaknesses through the Companys continuous assurance process.
The Directors believe that the Company maintains an effective, embedded system of internal controls and complies with the Turnbull Report guidance.
GROUP RISK AND CONTROL POLICY/ RISK ADVISORY GROUP
Supporting line management activities is a dedicated risk management team who help to ensure key risks are identified and communicated appropriately. The outputs of this team are reviewed by the Risk Advisory Group (RAG), which comprises senior representatives from each business function. The RAG considers new and emerging risks as well as risks across different parts of the organisation. It also plays an important role in promoting continuous improvement in the management of risk by sharing best practice throughout the organisation. It is chaired by the Chief Financial Officer and reports twice a year to the SET. The RAGs reports on the Companys risk profile are reviewed by both the Audit Committee and the Board.
THE US SARBANES-OXLEY ACT OF 2002
The Company has complied with those provisions of the Act applicable to foreign issuers. The Board believes that, prior to the Act coming into force, the Company
already had a sound corporate governance framework, good processes for the accurate and timely reporting of its financial position and results of operations, and an effective and robust system of internal controls. Consequently, the Companys approach to compliance with the Act has principally involved the development and adjustment of its existing corporate governance framework and associated processes concerning reporting, internal controls and other relevant matters.
The Directors assessment of the effectiveness of the internal control over financial reporting is set out on page 31 (Summary Financial Review).
THE NEW YORK STOCK EXCHANGE
CODE OF CONDUCT
The policy of the Company is to require all of its subsidiaries, and all employees, to observe high ethical standards of integrity and honesty and to act with due skill, care, diligence and fairness in the conduct of business. The Companys management seeks to reinforce the standards outlined in the Code of Conduct throughout the business. In particular, all employees are required to comply with the letter and spirit of the Code of Conduct and with the standards detailed by the Company in support of it. The Code of Conduct is available on the Companys website: astrazeneca.com.
CHIEF EXECUTIVE OFFICER, SENIOR EXECUTIVE TEAM AND DELEGATION OF AUTHORITY
The CEO has been delegated authority from, and is responsible to, the Board for directing and promoting the profitable operation and development of the Company, consistent with the primary aim of enhancing long-term shareholder value in relation to all matters save those which have been specifically reserved for the Board.
The CEO is responsible to the Board for the management and performance of the Companys businesses within the framework of Company policies, reserved powers and routine reporting requirements. He is obliged
SUMMARY GOVERNANCE CONTINUED
The CEO has established and chairs the SET. While the CEO retains full responsibility for the authority delegated to him by the Board, the SET is the vehicle through which he exercises that authority in respect of the Companys business (including Aptium Oncology and Astra Tech). The members of the SET are shown on pages 4 and 5. The SET normally meets once a month to consider and decide major business issues. It also usually reviews those matters that are of a size or importance to require the attention of, or that are reserved to, the Board before such matters are submitted to the Board for review and decision.
DISCLOSURE POLICY AND DISCLOSURE COMMITTEE
The Companys Disclosure Policy provides a framework for the handling and disclosure of inside information and other information of interest to shareholders and the investment community. It also defines the role of the Disclosure Committee. Led by the Chief Financial Officer, the Disclosure Committee meets regularly to assist and inform the decisions of the CEO concerning inside information and its disclosure.
DISCLOSURE OF INFORMATION TO AUDITORS
The Directors who held office at the date of approval of the 2006 Directors Report confirm that, so far as they are each aware, there is no relevant audit information of which the Companys auditors are unaware; and each Director has taken all the steps that he ought to have taken as a Director to make himself aware of any relevant audit information and to establish that the Companys auditors are aware of that information.
CHANGES IN SHARE CAPITAL
Changes in the Companys Ordinary Share capital during 2006 are shown in the table below:
RETURNS TO SHAREHOLDERS
The Companys stated distribution policy comprises both a regular cash dividend and a share re-purchase component, which provides a flexible means of returning value to shareholders, while allowing the Company to manage its capital structure more efficiently over time.
Shareholders have different preferences, and the Board believes the combination of regular cash dividends and share buyback programmes enables it to balance the interests of all shareholder groups.
The Board continually reviews its shareholders return strategy, and in 2006 re-stated its intention to grow dividends in line with earnings growth, while ensuring the dividend remains covered by at least two times earnings.
The Board also firmly believes the first call on free cash flow is investment in the business, after which surplus cash should be returned to the shareholders. Accordingly, in 2007 the Board intends to return $4 billion of funds to shareholders via a share re-purchase programme. Should there be additional cash inflow during 2007 from the issue of shares in respect of employees exercising share options, the Board will consider extending the re-purchase programme to include this additional amount.
During 2006, the Company purchased 72.2 million of its own Ordinary Shares with a nominal value of $0.25 each for cancellation, at an aggregate cost of $4.1 billion. Also during 2006, 23.5 million shares were issued in respect of employee share plans for a total consideration of $1.0 billion. The net number of shares repurchased in 2006 was therefore 48.7 million, which represents 3.1% of the Companys issued share capital at 1 January 2006.
Since the Company began its share re-purchase programmes in 1999, a total of 282.8 million Ordinary Shares have been purchased for cancellation at an aggregate cost of $13.3 billion. This represents approximately 15.9% of the Companys total
issued share capital at the time the repurchase programme commenced in 1999 (See table on page 30).
The Company continues to maintain robust controls in respect of all aspects of the share re-purchase programme to ensure compliance with English law and the FSAs Listing Rules, Disclosure Rules and Prospectus Rules. In particular, the Companys Disclosure Committee meets to ensure that the Company does not purchase its own shares during prohibited periods. At the 2007 AGM, the Company will seek a renewal of its current permission from shareholders to purchase its own shares.
CREDITOR PAYMENT POLICY
It is not Company policy formally to comply with the Confederation of British Industrys code of practice on the prompt payment of suppliers. It is, however, Company policy to agree to appropriate payment terms with all suppliers when agreeing to the terms of each transaction, to ensure that those suppliers are made aware of the terms of payment and, subject to their compliance, abide by the terms of payment. The total amount of money owed by AstraZeneca PLCs subsidiaries to trade creditors at the balance sheet date was equivalent to 74 days average purchases.
ANNUAL GENERAL MEETING
The Companys 2007 AGM will be held on Thursday 26 April 2007. The principal meeting place will be in London. There will be a simultaneous satellite meeting in Stockholm.
A resolution will be proposed at the 2007 AGM for the re-appointment of KPMG Audit Plc, London as auditor of the Company.
On behalf of the Board
SUMMARY DIRECTORS REMUNERATION REPORT
This is a summary of the Directors Remuneration Report that has been prepared in accordance with the Directors Remuneration Report Regulations 2002 (the Regulations). As required by the Regulations, a resolution to approve the Directors Remuneration Report will be proposed at the Annual General Meeting (AGM) on Thursday 26 April 2007.
The members of the Remuneration Committee are Sir Peter Bonfield (Chairman of the Committee), John Buchanan, Joe Jimenez, Erna Möller and (since 26 July 2006) John Varley. They are all Non-Executive Directors. Sir Peter Bonfield and Erna Möller do not intend to submit themselves for re-election as Directors at the AGM in 2007, and Sir Peters role as Chairman of the Committee will be assumed by John Varley.
OVERALL REMUNERATION POLICY AND PURPOSE
In determining the level of Directors remuneration, the Remuneration Committee considers the policies, practices and other factors that relate to all employees, as set out below.
In general, the Company is committed to maintaining a dynamic performance culture, in which every employee is clear about the Companys objectives, and knows how their work impacts on those objectives and that they will benefit from achieving high levels of performance. It is against this background that the specific remuneration of the Executive Directors and other members of the Senior Executive Team (SET) is considered in the deliberations of the Board and the Remuneration Committee.
EXECUTIVE DIRECTORS REMUNERATION
There is a requirement for SET members to defer a portion of their bonus earned into shares for a period of three years. The portion currently deferred into shares is one third of the pre-tax bonus for Executive Directors and one sixth for all other SET members.
SUMMARY DIRECTORS REMUNERATION REPORT CONTINUED
PERFORMANCE TARGETS AND MEASUREMENTS
In respect of the above short-term bonuses for 2006, relevant factors included strong financial results ahead of expectations and excellent progress in key areas. Earnings per share increased by 34% compared to 2005; global sales increased by 11% overall and by 23% for key growth products; operating profit increased by 28% and R&D investment by 16% (all at constant exchange rates).
The development pipeline was strengthened and now comprises 120 projects (compared with 106 a year earlier), including 95 new chemical entities and 25 life-cycle management projects. Significant externalisation activity included six significant licence and acquisition transactions signed during the calendar year, among them the acquisition of Cambridge Antibody Technology Group plc. Good progress was made in life-cycle management, with nine submissions and nine approvals in the US or EU, including the submissions for Crestor (atherosclerosis) and Seroquel SR (schizophrenia) in both the EU and US. These achievements were underpinned by a continuing emphasis on cost discipline, improved productivity and performance management. Bonus outcomes for 2006 reflected overall corporate and relevant functional performance in 2006 against clear objectives in relation to:
During 2006, we reviewed our Business Performance Management framework, with a view to further enhancing our focus on our strategic objectives. Bonus outcomes for 2007 will reflect overall corporate and relevant functional performance against clear objectives in relation to:
More information about these objectives is set out on pages 26 and 27.
The Chief Executive Officer is a member of the AstraZeneca US Defined Benefit Pension Plan, under a schedule applicable to legacy Astra
Merck employees. Benefits for members of this plan are delivered on a tax-qualified basis, with accrued benefits that exceed specific limits under the plans formula and the US Tax Code being delivered through a supplementary, non-qualified pension plan (accruals in respect of the UK service being booked in the UK accounts). The normal pension age under both plans is 65. The tax-qualified plan has unreduced, early retirement benefits payable at age 62, or earlier if:
Similar early retirement terms apply to the supplementary, non-qualified plan, as it relates to highly compensated employees.
On death in retirement, there is a pension payable to the surviving spouse or other dependent if the member so elects prior to retirement.
In the UK, certain changes to the tax treatment of pensions took effect from 6 April 2006. The Remuneration Committee considered the impact those changes may have on UK Executive Directors pension arrangements. The Remuneration Committee endorsed the offer of a cash allowance in lieu of future pension, offered annually and payable at the election of each individual UK Executive Director. The cash allowance is consistent with the cost of the alternative gross pension benefit.
The Executive Director, Development has elected to remain a member of the Companys main UK defined benefit pension plan for the option year 2006/7 rather than take the cash allowance. The normal pension age under this plan is 62. However, a members accrued pension is available from age 60 without any actuarial reduction. In addition, the accrued pension is available, unreduced, from age 57 if the Company consents to a request for early retirement and from age 50 if the retirement is at the Companys request. On death in retirement, the accrued pension is guaranteed payable for the first five years of retirement and then reduces to two-thirds of this amount should there be a surviving spouse or other dependant.
The Chief Financial Officer benefits from a pension promise equivalent to membership of the defined benefit pension plan that applies to the Executive Director, Development. The composition of the promise originates
from the application of the statutory earnings cap, which has now been removed following the April 2006 tax changes to the treatment of pensions in the UK. The equivalent pension promise remains unchanged. It is delivered through a combination of:
ASTRAZENECA PERFORMANCE SHARE PLAN
2006 was the second year of operation of the AstraZeneca Performance Share Plan (the Plan).
GRANT AND VESTING OF AWARDS
BASIS OF PARTICIPATION
Generally, Awards can be granted at any time, but not during a close period of the Company. As reported last year, the first grant of Awards was made on 29 June 2005 (the 2005 Award). In 2006, grants of Awards were made on 24 March and 19 May (the 2006 Award). Details of these grants are shown in the table on page 40.
commencing on 1 January 2005. For the 2006 Award, the performance target relates to the three-year period commencing on 1 January 2006.
TSR looks at share price increase and dividends re-invested in respect of a notional number of shares, from the beginning of the relevant performance period to the end of it, and ranks the companies in the selected comparator group by reference to the TSR achieved over that period. The rank which the Companys TSR achieves over the performance period will determine how many Shares will vest under the relevant Award, as per the vesting schedule shown in the table below:
To alleviate any short-term volatility, the return index is averaged in the TSR calculations for each company over the three months prior to the start and end of the relevant performance period.
The Remuneration Committee has the discretion to award Shares up to a further 25% over and above the Shares subject to the Award, if the Companys TSR performance is substantially better than that of the upper quartile of the comparator group.
The Remuneration Committee may vary or waive these performance targets to take account of events that lead the Remuneration Committee, acting fairly and reasonably, to believe the performance targets to be no longer appropriate.
PERFORMANCE UNDER THE ASTRAZENECA PERFORMANCE SHARE PLAN IN 2006
DETAILS OF EXECUTIVE DIRECTORS SERVICE CONTRACTS AT 31 DECEMBER 2006
SUMMARY DIRECTORS REMUNERATION REPORT CONTINUED
DIRECTORS AND FORMER DIRECTORS INTERESTS IN PERFORMANCE SHARE PLAN AWARDS
The interests of David Brennan at 31 December 2006 in ADSs of AstraZeneca PLC that are the subject of awards under the AstraZeneca US Executive Performance Share Plan (established in 2000) are not included in the above table but are shown below. One ADS equals one Ordinary Share. The number of ADSs to which Mr Brennan may become unconditionally entitled on the vesting date will be determined by reference to AstraZenecas total shareholder return compared to that of other companies in the US Pharmaceutical Human Resources Association over the three-year performance period.
These Summary Financial Statements are a summary of information in the Groups Financial Statements, Directors Report and Directors Remuneration Report and do not contain sufficient information to allow for as full an understanding of the results and state of affairs of the Group as would be provided by the full Group Financial Statements, Directors Report and Directors Remuneration Report. Shareholders requiring more detailed information have the right to obtain, free of charge, a copy of the Groups last full Annual Report and Form 20-F Information, available from the Secretary at the registered office of the Company.
The Summary Financial Statements on pages 42 to 46 were approved by the Board of Directors on 1 February 2007 and were signed on its behalf by:
AUDITORS STATEMENT TO
THE MEMBERS OF ASTRAZENECA PLC, PURSUANT TO SECTION 251 OF THE COMPANIES ACT
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS
Our responsibility is to report to you our opinion on the consistency of the Summary Financial Statements within the Annual Review 2006 with the full annual Financial Statements, the Directors Report and the Directors Remuneration Report, and its compliance with the relevant requirements of section 251 of the Companies Act 1985 and the regulations made thereunder.
We also read the other information contained in the Annual Review 2006 and consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the Summary Financial Statements.
BASIS OF OPINION
1 February 2007
KPMG Audit Plc
All activities were in respect of continuing operations.
STATEMENT OF RECOGNISED INCOME AND EXPENSE
Tax on items taken directly to reserves in 2004 includes a credit of $357m in respect of foreign exchange losses in 2000.
$m means millions of US dollars.
CONSOLIDATED BALANCE SHEET
The Summary Financial Statements on pages 42 to 46 were approved by the Board of Directors on 1 February 2007 and were signed on its behalf by:
CONSOLIDATED CASH FLOW STATEMENT
The second interim dividend, to be confirmed as final, is $1.23 per share and $1,885m in total. This will be payable on 19 March 2007.
On payment of the dividends, exchange losses of $3m (2005 losses of $41m, 2004 gains of $30m) arose. These exchange gains and losses are included in finance income and expense.
There are no options, warrants or rights outstanding in respect of unissued shares except for employee share option schemes. The earnings figures used in the calculations above are unchanged for diluted earnings per Ordinary Share. Earnings per Ordinary Share before exceptional items in 2004 exclude the effect of two items the profit after tax on the sale of an interest in a joint venture of $228m and tax relief of $58m in respect of an agreement with the US tax authority to allow a part of the Zoladex settlement recognised in 2002 as deductible.
Subsequent to year end, we entered into two collaboration agreements with Bristol-Myers Squibb Company and Palatin Technologies Inc. for initial consideration of $100 million and $10 million respectively. These amounts will be capitalised as intangible assets in 2007. The collaboration with Bristol-Myers Squibb is to develop and commercialise two investigational compounds being studied for the treatment of Type 2 diabetes. We also entered into an agreement to purchase the total share capital of Arrow Therapeutics Ltd for $150m. Arrow Therapeutics Ltd is a privately owned UK biotechnology company focused on the discovery and development of anti-viral therapies.
DIRECTORS EMOLUMENTS IN 2006
The aggregate remuneration, excluding pension contributions and the value of share options and performance share plan awards, paid to or accrued for all Directors and officers of the Company for services in all capacities during the year ended 31 December 2006 was £12 million ($21 million). Remuneration of individual Directors is set out below in sterling and US dollars. All salaries, fees, bonuses and other benefits for Directors are established in sterling.
GROUP FINANCIAL RECORD
At 31 December 2006, AstraZeneca PLC had 137,137 registered holders of 1,532,245,608 Ordinary Shares of $0.25 each. At 31 December 2006, there were approximately 100,000 holders of American Depositary Receipts (ADRs) representing 10.48% of the issued share capital and 157,000 holders of shares held under the VPC Services Agreement representing 23.32% of the issued share capital. The ADRs, each of which is equivalent to one Ordinary Share, are issued by JPMorgan Chase Bank.
The record date for the first interim dividend for 2007, payable on 17 September 2007 (in the UK, the US and Sweden), is 10 August 2007.
FINANCIAL CALENDAR 2007