Results of operations - summary analysis of year to 31 December 2007
The tables on this page show our sales analysed both by therapy area and by key, patent expiry and base products and operating profit for 2007 compared to 2006.
Reported performance
Our sales increased by 12% from $26,475 million to $29,559 million, an increase reflecting both the acquisition of MedImmune and the entry of generic competition on all strengths of Toprol-XL in the US, as well as general business performance. Operating profit fell by 1%, again reflecting the impacts of MedImmune and Toprol-XL together with restructuring and synergy costs. Earnings per share for the year were $3.74, a 3% decline from $3.86 in 2006.
SALES BY THERAPY AREA (2007 AND 2006)
| 2007 | 2006 | 2007 compared to 2006 | ||||
|---|---|---|---|---|---|---|
| $m | Growth underlying $m |
Growth due to exchange effects $m |
$m | Growth underlying % |
Growth reported % |
|
| Cardiovascular | 6,686 | 292 | 276 | 6,118 | 5 | 9 |
| Gastrointestinal | 6,443 | (379) | 191 | 6,631 | (6) | (3) |
| Infection and other | 1,714 | 779 | 60 | 875 | 89 | 96 |
| Neuroscience | 5,340 | 484 | 152 | 4,704 | 10 | 14 |
| Oncology | 4,819 | 359 | 198 | 4,262 | 8 | 13 |
| Respiratory and Inflammation | 3,711 | 369 | 191 | 3,151 | 12 | 18 |
| Others | 846 | 79 | 33 | 734 | 11 | 15 |
| Total | 29,559 | 1,983 | 1,101 | 26,475 | 7 | 12 |
SALES BY KEY, PATENT EXPIRY AND BASE PRODUCTS (2007 AND 2006)
| 2007 | 2006 | 2007 compared to 2006 | ||||
|---|---|---|---|---|---|---|
| $m | Growth underlying $m |
Growth due to exchange effects $m |
$m | Growth underlying % |
Growth reported % |
|
| Key (Arimidex, Crestor, Nexium, Seroquel, Symbicort) |
15,344 | 1,511 | 515 | 13,318 | 11 | 15 |
| Patent expiry (Losec, Nolvadex, Plendil, Seloken/Toprol-XL, Zestril) |
3,230 | (728) | 121 | 3,837 | (19) | (16) |
| Base | 10,985 | 1,200 | 465 | 9,320 | 13 | 18 |
| Total | 29,559 | 1,983 | 1,101 | 26,475 | 7 | 12 |
OPERATING PROFIT (2007 AND 2006)
| 2007 | 2006 | Percentage of sales | 2007 compared to 2006 | |||||
|---|---|---|---|---|---|---|---|---|
| $m | Growth underlying $m |
Growth due to exchange effects $m |
2006 $m |
2007 % |
2006 % |
Growth underlying % |
Growth reported % |
|
| Sales | 29,559 | 1,983 | 1,101 | 26,475 | 7 | 12 | ||
| Cost of sales | (6,419) | (703) | (157) | (5,559) | (21.7) | (21.0) | 13 | 15 |
| Gross margin | 23,140 | 1,280 | 944 | 20,916 | 78.3 | 79.0 | 6 | 11 |
| Distribution costs | (248) | (7) | (15) | (226) | (0.8) | (0.9) | 3 | 10 |
| Research and development | (5,162) | (944) | (316) | (3,902) | (17.5) | (14.7) | 24 | 32 |
| Selling, general and administrative | (10,364) | (843) | (425) | (9,096) | (35.1) | (34.4) | 9 | 14 |
| Other operating income and expense | 728 | 188 | 16 | 524 | 2.5 | 2.0 | 36 | 39 |
| Operating profit | 8,094 | (326) | 204 | 8,216 | 27.4 | 31.0 | (4) | (1) |
Underlying performance
Sales
Sales for the full year increased 7%. The contribution to sales growth from MedImmune more than offset the decline from Toprol-XL in the US. Sales in the US were up 7%, and this was broadly similar to sales growth in the market if Toprol-XL and MedImmune were excluded. Sales outside the US were up 8%, comprising growth of 5% in Established markets and 17% in the Emerging markets.
For the second year, our portfolio has 11 brands with annual sales greater than $1 billion and, with the acquisition of MedImmune, we have acquired another brand, Synagis, which is expected to deliver such performance annually. The combined sales of our key products (Arimidex, Crestor, Nexium, Seroquel and Symbicort) grew by 11% to $15,344 million, and now account for about 52% of our turnover. Base products increased by 13% whilst patent expiry products declined by 19%.
Gastrointestinal sales have declined by 6%. Nexium sales were slightly down for the full year to $5,216 million, a 2% decline. Sales in the US were down 4%, as market share gains for Nexium in the branded segment of the PPI market were offset by the continued strong growth of generic omeprazole and lower realised prices for Nexium. Nexium sales in other markets were up 2%. Losec sales declined by 20%, with significant declines in Canada and Western Europe only partially offset by increases in Japan and China.
Despite the impact of generic competition to Toprol-XL in the US, the Cardiovascular portfolio enjoyed a 5% increase, driven by Crestor sales which for the full year were up 33% to $2,796 million. Crestor sales in the US were up 24%, whilst sales in other markets increased 45% (and now comprise almost half of the worldwide total for Crestor). In November 2007, Crestor received US FDA approval for a new indication, as an adjunct to diet to slow the progression of atherosclerosis in patients with elevated cholesterol. Seloken/Toprol-XL sales outside of the US increased slightly in the year but, overall, the brand declined by 22%. Atacand recorded a 9% rise, whilst the rest of the portfolio saw small falls.
Respiratory and Inflammation sales increased by 12%, with strong performances from Symbicort and Pulmicort. Symbicort sales for the full year were up 22% to $1,575 million, including $50 million in the US since launch in June this year. In the US, Symbicort share of patients newly starting fixed combination therapy reached 11.5% in the week ending 18 January 2008, with a 5.8% share of all new prescriptions for combination products. Sales outside the US were up 18% for the full year. Pulmicort sales increased by 10% to $1,454 million on the back of a 15% improvement in the US.
The Neuroscience therapy area is dominated by Seroquel, where sales increased 15% to $4,027 million, with sales in the US up 15% and sales up 16% in other markets. The launch rollout of the schizophrenia indication for Seroquel XR is underway, with regulatory submissions for acute bipolar mania and bipolar depression in Europe, and major depressive disorder and generalised anxiety disorder in the US and Europe, planned for 2008.
Sales in the Oncology therapy area increased by 8% with good performances across the portfolio. Arimidex sales increased 10% for the full year to $1,730 million, on a 13% increase in the US and 8% sales growth in other markets. Casodex sales benefited from strong performances in Western Europe and Japan, whilst Zoladex recorded increases in Japan and Emerging ROW.
The Infection and other therapy area grew strongly through the addition of Synagis and FluMist following the acquisition of MedImmune, with a resultant 89% increase in sales to $1,714 million.
Geographical analysis
We discuss the geographical performances in the Geographical Review section.
Operating margin and retained profit
OPERATING MARGIN (2007 AND 2006)
| Reported 2007 $m |
Restructuring and synergy costs 2007 $m |
MedImmune 2007 $m |
Excluding restructuring and synergy costs and MedImmune 2007 $m |
Reported 2006 $m |
Reported % of sales |
Excluding restructuring and synergy costs and MedImmune % of sales |
Change in percentage versus comparative period1 | |
|---|---|---|---|---|---|---|---|---|
| Sales | 29,559 | – | (714) | 28,845 | 26,475 | |||
| Cost of sales | (6,419) | 415 | 242 | (5,762) | (5,559) | (21.7) | (20.0) | +1.0 |
| Gross margin | 23,140 | 415 | (472) | 23,083 | 20,916 | 78.3 | 80.0 | +1.0 |
| Distribution | (248) | – | 4 | (244) | (226) | (0.8) | (0.8) | +0.1 |
| Research and development | (5,162) | 73 | 255 | (4,834) | (3,902) | (17.5) | (16.8) | -2.1 |
| Selling, general and administrative costs | (10,364) | 478 | 560 | (9,326) | (9,096) | (35.1) | (32.3) | +2.1 |
| Other operating income | 728 | – | (169) | 559 | 524 | 2.5 | 1.9 | -0.1 |
| Operating profit | 8,094 | 966 | 178 | 9,238 | 8,216 | 27.4 | 32.0 | +1.0 |
1The changes in percentage uses the ‘excluding restructuring and synergy costs and MedImmune’ figures; a positive number indicates favourable effect on operating margin versus comparative period.
Operating profit for the full year was $8,094 million, down 4%. Excluding restructuring and synergy costs, operating profit increased to $9,060 million (up 8%). This operating profit improvement was net of a reported $1,187 million increase in R&D investment, and was fuelled by revenue growth, improved gross margin and lower expenditures in SG&A on a constant currency basis. Restructuring and synergy benefits of $300 million were realised during the year.
For the full year, reported operating margin was 27.4%. Excluding MedImmune losses of $178 million and combined restructuring and synergy costs of $966 million, operating margin was 32.0%, an increase of 1.0 percentage points on 2006.
Gross margin decreased by 0.7 percentage points. After adjusting for the impact of MedImmune and restructuring and synergy costs, gross margin increased by 1.0 percentage points to 80.0%. Principal drivers included reduced payments to Merck (0.7 percentage points), asset provisions booked during the prior period (0.4 percentage points) and favourable currency movements (0.2 percentage points). An adverse effect arose from increased royalty payments, which led to a 0.4 percentage point reduction.
R&D investment increased by 24% to $5,162 million, 17.5% of sales, an increase of 2.8 percentage points. After adjusting for the impact of MedImmune and restructuring and synergy costs, R&D expenditure was $4,834 million in 2007, up 16% (and 2.1 percentage points) over 2006 due principally to increased activity levels and the effect of the externalisation strategy.
Selling, general and administrative costs increased by 9% to $10,364 million. After adjusting for the impact of MedImmune and restructuring and synergy costs, SG&A costs were 2% lower than the same period in 2006 (an improvement of 2.1 percentage points), primarily as a result of operational efficiencies from our selling and marketing activities.
At $728 million, other operating income and expense was 36% higher than 2006. After adjusting for the impact of MedImmune (which contributed other income primarily through human papilloma virus vaccine royalty income), other income of $559 million was $35 million higher than 2006, as expected reductions in royalty income were more than offset by higher one-time gains and insurance recoveries.
Total charges of $966 million have been taken in respect of the restructuring and synergy programmes, of which $723 million represent cash costs. Over the same period, productivity initiative benefits of $250 million and synergy benefits of $50 million have been realised.
MedImmune contributed an operating loss of $178 million (which includes amortisation costs of $255 million) in 2007.
Net finance expense was $111 million in the full year (2006 income $327 million). The decrease versus last year is principally attributable to the interest payable on the borrowings to acquire MedImmune, Inc.. Interest expense on the new debt was $446 million. The reported amounts include net income of $34 million (2006 $43 million) arising from employee benefit fund assets and liabilities reported under IAS 19 ‘Employee Benefits’.
The effective tax rate for the year was 29.5%, similar to the 29% for 2006. The slight increase for the year compared to 2006 reflects the combined effect of differences in the geographical mix of profits, the reversal of tax deductions relating to share-based payments, the reduction in the UK tax rate as applied to UK net deferred tax liabilities, and an increase in tax provisions principally in relation to global transfer pricing. The full year tax rate for 2008 is anticipated to be similar to 2007.
Reported earnings per share were $3.74 compared with $3.86 in 2006, a decrease of 5%. After adjusting for the impact of restructuring and synergy costs, earnings per share rose from $3.86 to $4.20, an increase of 7%. Excluding the impact of MedImmune as well, earnings per share increased by 15% to $4.52. The share re-purchase programme is calculated to have added 8 cents to EPS during the year, after allowing for an estimate of interest income foregone.
In 2007, Toprol-XL contributed US sales of $969 million (2006 $1,382 million) and earnings per share of 39 cents (2006 50 cents). If Toprol-XL were excluded from the full year results for both the current and prior year periods, sales growth would be 10% and earnings per share would be down 3%.
COMPONENTS OF EARNINGS PER SHARE
| 2007 $ |
2006 $ |
|
|---|---|---|
| Reported earnings per share | 3.74 | 3.86 |
| Restructuring and synergy costs | 0.46 | – |
| Reported, excluding restructuring and synergy costs | 4.20 | 3.86 |
| MedImmune | 0.32 | – |
| 4.52 | 3.86 | |
| Toprol-XL contribution | (0.39) | (0.50) |
| Total | 4.13 | 3.36 |
The effects of MedImmune, restructuring and synergy costs and Toprol-XL in the US on earnings per share is summarised in the table above.
