Financial position, including cash flow and liquidity - 2006
All data in this section are on an actual basis (unless otherwise stated).
The net book value of our assets increased from $13,691 million to $15,416 million. Net profit was distributed by dividends of $2,217 million and share buy-backs of $4,147 million.
Property, plant and equipment
The increase in the value of property, plant and equipment was due primarily to additions of $822 million and exchange of $689 million offset by depreciation and impairments of $1,003 million. Additions were mainly driven by investment in building upgrades in the UK, Sweden and the US as well as a vehicle programme in the US.
Goodwill and intangible assets
The significant increase in the value of goodwill and intangibles was primarily due to the expansion of our externalisation programme (as described in more detail below). The additions of $1,360 million arising from the acquisition of Cambridge Antibody Technology were partly offset by the disposal of the Humira™ royalty stream intangible acquired with the company ($661 million). The other major additions were from the acquisition of KuDOS Pharmaceuticals ($297 million), the co-promotion agreement in respect of Abraxane® ($200 million) and software ($121 million).
Inventories
After excluding the effects of exchange of $203 million, the value of inventories fell by $159 million to $2,250 million, a reduction of just over 7%. This reflected a continuation of the work to reduce our inventory levels, with reductions seen primarily in the US (including declines in the levels of Merck-related inventory) and in the UK.
Receivables and payables
Receivables grew from $4,778 million at the end of 2005 to $5,561 million at the close of 2006. $270 million of this increase was due to exchange. The underlying rise of $513 million was driven by increases in trade debtors in the US (through higher sales in the last months of the year), the UK (primarily from higher export sales) and across several European markets. The second instalment of income due from the disposal of the anaesthetics business in the US (as described in more detail below) also contributed to the increase, which was offset by reductions in insurance balances.
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) and the deferred income from the disposal of the anaesthetics business. There were also increases from insurance payables and Toprol-XL related severance provisions, which were reduced by the settlement of the defined benefit pension scheme in Japan. In addition, exchange effects accounted for just over $400 million.
Cash flow
Cash generated from operating activities in the year was $7,693 million, $950 million higher than in 2005. The improvement was due principally to an increase in profit before tax of $1,876 million offset by a $224 million increase in working capital requirements and a $563 million increase in tax paid. Tax paid for the year was $2,169 million compared to $1,606 million in 2005. This increase in 2006 compared to 2005 was due to increased profits in 2006.
Net cash outflows from investing activities were $272 million compared to $1,182 million in 2005. Net cash from investing activities was affected by the management of Group funds, with funds being transferred between long-term deposits and liquid cash. After excluding these inflows of $1,120 million (outflows of $491 million in 2005), underlying cash flows associated with investing activities were an outflow of $1,392 million in 2006 compared with $691 million in 2005. During the year, cash of $1,148 million was paid for the acquisition of Cambridge Antibody Technology and KuDOS Pharmaceuticals. There was a $388 million increase in expenditure on intangible assets as a result of the new collaboration deals (as described in the section immediately below). Proceeds of $661 million were received on disposal of the Humira™ royalty stream, an asset acquired as part of the acquisition of Cambridge Antibody Technology.
After shareholder returns of $5,382 million (comprising net share re-purchases of $3,162 million and $2,220 million dividend payments), and a net $1,148 million cash outflow from acquisitions (net of cash acquired), there was an overall increase in net funds of $1,135 million.
Investments, divestments and capital expenditure
The commitment to strengthening our product pipeline through pursuing external opportunities (in addition to the sustained investment in internal discovery and development) bore fruit in 2006 with two major acquisitions and several other significant licensing agreements and collaborations. In January 2006, we acquired the entire share capital of KuDOS Pharmaceuticals for $206 million to access DNA repair technology as well as several products, including the poly-ARP-ribose polymerase inhibitor in Oncology. We followed this by acquiring the total share capital of Cambridge Antibody Technology (adding to the 19.9% we have held since December 2004) to provide a foundation for establishing a significant biopharmaceuticals capability. The total cost of this acquisition of $1,116 million was reduced by disposing of the non-core intangible asset arising from the Humira™ royalty stream for $661 million in October 2006.
These acquisitions were complemented by significant licensing and collaboration agreements. These were led by four significant agreements with AtheroGenics, Inc., Protherics PLC, Targacept Inc., and POZEN, Inc., with combined payments (capitalised as intangible assets) in 2006 of $151 million. With AtheroGenics we entered into a development and commercialisation agreement for AGI-1067, a novel anti-atherosclerotic agent being studied for the treatment of patients with coronary disease, paying an upfront fee of $50 million in January 2006. Our agreement with Protherics is in respect of the anti-sepsis product CytoFab™ and involved both a 4.3% equity investment in Protherics of $13 million and an intangible asset of $31 million. In the case of Targacept, we have capitalised as an intangible asset payments totalling $30 million in respect of a neuronal nicotinic partial agonist focused on cognitive disorders. The payments comprised a $10 million upfront fee on signing and a $20 million milestone payment when proof of concept studies commenced. The agreement with POZEN is for the co-development of a combination product comprising esomeprazole and naproxen with an upfront fee of $40 million. In addition to these, we have entered into agreements with Schering AG, Array, Kinacia, Dynavax, Cubist and Argenta, capitalising around $70 million in intangible assets. All of these agreements include provisions for further payments over and above the initial signing or upfront fees, depending on certain development and sales milestones. The second payment to Targacept is an example of such milestones.
Complementing these agreements, in June 2006 we entered into a co-promotion agreement with Abraxis BioScience, Inc. in respect of Abraxane® in the US. An upfront signing fee of $200 million was paid and to date we have earned $18 million in alliance revenue from the arrangement. We have also entered into an agreement with Abbott Laboratories to co-develop and co-promote a single pill, fixed dose combination of Crestor and an Abbott fenofibrate. Abbott has paid $50 million upfront, recognition of which has been deferred and will be credited to income should we elect to launch the product. Lastly, we disposed of our Diprivan and local anaesthetics business in the US to Abraxis for a total price of $340 million, comprising an upfront payment of $265 million and $75 million to be paid in 2007. A gain of $109 million was recognised immediately with the balance to be recognised over the accompanying five year manufacturing arrangement.
On behalf of the Board
G H R MUSKER
Group Secretary and Solicitor
31 January 2008
