AstraZeneca Annual Report and Form 20-F Information 2011

Financial ReviewResults of operations – summary analysisof year to 31 December 2010 continued2010 revenue was unchanged (Reported: up 1%). Revenue in 2010benefited from strong growth of Crestor, Symbicort and Seroqueloffset by lower revenues for Pulmicort, Arimidex and Casodex and theabsence of H1N1 vaccine revenue. Emerging Markets sales growth of16% (Reported: 19%) and Established ROW 7% (Reported: 17%) wasoffset by a decline in US sales of 7% (Reported: 7%) with sales inWestern Europe up 2% (Reported: down 1%). Further details of oursales performance are contained in the Performance 2010 sectionsof the Therapy Area Review from page 56.Core gross margin in 2010 of 81.2% declined 1.6 percentage points(Reported: 1.8 percentage points). The impairment of lesogaberan,the 2009 benefit from the release of a provision with respect to theresolution of an issue related to a third party supply contract, higherroyalties and adverse regional and product mix were only partiallyoffset by lower payments to Merck.Core R&D expenditure in 2010 was $4,219 million, 4% lower than2009 (Reported: 3%). Increased investment in biologics was morethan offset by lower project costs and operational efficiencies. Thelower project costs in 2010 were the result of several late stageprojects completing their trials, partially offset by the commencementof Phase III programmes for TC-5214 and fostamatinib.2010 Core SG&A costs of $9,777 million were 2% lower than 2009(Reported: 1%). Investment in Emerging Markets and recentlylaunched brands were more than offset by operational efficienciesacross Established Markets.Core other income of $910 million in 2010 was $16 million less than2009. 2009 benefited from disposal gains related to Abraxane TM andthe Nordic OTC business and 2010 included royalties from sales ofTeva’s generic version of Pulmicort Respules.Core pre-R&D operating margin was 53.5% in 2010, down 1.0percentage points (Reported: 1.2 percentage points), with the lowergross margin only partially offset by efficiencies within selling, generaland administrative areas.2010 Core operating profit was $13,603 million, unchanged at CER.2010 Core operating margin declined by 0.4 percentage points to40.8%, with lower R&D expense and operational efficiencies onlypartially offsetting the decline in the gross margin.Core EPS were $6.71 in 2010, up 5% (Reported: 6%), with theoperating performance boosted by lower net finance expense, thebenefit of a lower average number of shares outstanding and a lowereffective tax rate.Core adjustments in 2010 were broadly in line with 2009, withincreased restructuring costs and intangible impairments offset bygains chiefly attributable to changes in the Group’s UK pensionarrangements. Excluded from Core in 2010 were:> Impairment charges of $568 million, arising from impairments inrespect of motavizumab ($445 million) and our HPV cervical cancervaccine income stream ($123 million), both capitalised as part of theMedImmune acquisition. Total impairment charges relating tointangible fixed assets were $833 million in 2010.> $612 million of legal settlements, of which $592 million was inrespect of the ongoing Seroquel product liability litigation and stateattorney general investigations into sales and marketing practicesin aggregate. In line with prior years these have been excluded fromour Core performance.> Restructuring costs totalling $1,202 million, incurred as the Groupcontinues its previously announced efficiency programmes.> Amortisation totalling $518 million relating to assets capitalised aspart of the MedImmune acquisition and the Merck exit arrangements.> A credit of $791 million chiefly attributable to a curtailment gainrelated to changes made to benefits under the Group’s UK pensionarrangements. In 2010, we amended our UK defined benefit fund.Pensionable pay was frozen at its 30 June 2010 level but thedefined benefit fund remains open to existing members. Membersof the pension fund were given the option of remaining in the fundor leaving the fund. Those that chose to leave the fund were offeredfunding which they could contribute to a new Group Self InvestedPersonal Pension Plan. This change to the UK defined benefitscheme represented an accounting curtailment of certain pensionobligations and, in accordance with IAS 19 ‘Employee Benefits’,these obligations were revalued by the scheme actuariesimmediately prior to the curtailment and the assumptions updatedat that date.2010 operating profit was down 1% at CER (Reported: unchanged)at $11,494 million. Basic EPS were $5.60, up 7% (Reported: 8%), asa result of the factors affecting Core EPS.Net finance expense was $517 million in 2010, versus $736 millionin 2009. Fair value gains of $5 million were recorded on long-termbonds in 2010, versus fair value losses of $145 million for 2009. Inaddition to this, there was reduced interest payable on lower debtbalances, and slightly increased returns from higher cash and cashequivalent balances.The 2010 taxation charge of $2,896 million (2009: $3,263 million)consisted of a current tax charge of $3,435 million (2009: $3,105 million)and a credit arising from movements on deferred tax of $539 million(2009: charge of $158 million). The 2010 current year tax chargeincluded a prior period current tax adjustment of $370 million (2009:$251 million) relating mainly to an increase in provisions for taxcontingencies and double tax relief, partially offset by a benefit of$342 million arising from a number of tax settlements and taxaccrual to tax return adjustments. The 2009 prior period current taxadjustments related mainly to tax accrual to tax return adjustments,an increase in provisions in respect of a number of transfer pricingaudits and double tax relief. The effective tax rate for 2010 was 26.4%(2009: 30.2%, 28.8% excluding the impact of legal provisions).Total comprehensive income for 2010 increased by $616 million from2009. This was driven by the increase in profit of $537 million and anincrease of $79 million in other comprehensive income.Cash flow and liquidity – 2010All data in this section is on a Reported basis.Cash generated from operating activities was $10,680 million in theyear to 31 December 2010, compared with $11,739 million in 2009.The decline of $1,059 million was primarily driven by legal settlementsof $709 million relating to Seroquel sales and marketing practices andproduct liability and Average Wholesale Price Litigation in the US, andthe first instalment of $562 million (£350 million) in respect of the UKtax settlement.Investments cash outflows of $2,236 million in 2010 included theacquisition of Novexel ($348 million), the payment of $647 millionto Merck (resulting in the Group acquiring Merck’s interest in certainAstraZeneca products) and a further $537 million paid out onother externalisation arrangements. Cash outflows on the purchaseof tangible fixed assets amounted to $791 million in 2010. Furtherdetails of the Novexel business acquisition and our arrangementswith Merck are included in Note 22 and Note 25 to the FinancialStatements respectively.Net cash distributions to shareholders increased from $2,842 millionin 2009 to $5,471 million in 2010 through dividend payments of$3,361 million and net share repurchases of $2,110 million.92 Financial ReviewAstraZeneca Annual Report and Form 20-F Information 2011