Results of operations - summary analysis of year to 31 December 2006
The tables below show our sales by therapy area and by key, patent expiry and base products and operating profit for 2006 compared to 2005.
Reported performance
Our sales grew by 11% from $23,950 million to $26,475 million, an increase of $2,525 million. Operating profit increased by 26% from $6,502 million to $8,216 million. Earnings per share for the year were $3.86, a rise of 33% from $2.91 in 2005. We estimate that without the sales and contribution from Toprol-XL in the US sales growth would have been 11% and earnings per share would have been $3.36, up 35% over 2005.
SALES BY THERAPY AREA (2006 AND 2005)
| 2006 | 2005 | 2006 compared to 2005 | ||||
|---|---|---|---|---|---|---|
| $m | Growth underlying $m |
Growth due to exchange effects $m |
$m | Growth underlying % |
Growth reported % |
|
| Cardiovascular | 6,118 | 780 | 6 | 5,332 | 15 | 15 |
| Gastrointestinal | 6,631 | 297 | (21) | 6,355 | 4 | 4 |
| Infection and other | 875 | 37 | (1) | 839 | 4 | 4 |
| Neuroscience | 4,704 | 656 | (11) | 4,059 | 16 | 16 |
| Oncology | 4,262 | 470 | (53) | 3,845 | 12 | 11 |
| Respiratory and Inflammation | 3,151 | 284 | (6) | 2,873 | 10 | 10 |
| Others | 734 | 89 | (2) | 647 | 13 | 13 |
| Total | 26,475 | 2,613 | (88) | 23,950 | 11 | 11 |
SALES BY KEY, PATENT EXPIRY AND BASE PRODUCTS (2006 AND 2005)
| 2006 | 2005 | 2006 compared to 2005 | ||||
|---|---|---|---|---|---|---|
| $m | Growth underlying $m |
Growth due to exchange effects $m |
$m | Growth underlying % |
Growth reported % |
|
| Key (Arimidex, Crestor, Nexium, Seroquel, Symbicort) |
13,318 | 2,475 | (6) | 10,849 | 23 | 23 |
| Patent expiry (Losec, Nolvadex, Plendil, Seloken/Toprol-XL, Zestril) |
3,837 | (335) | (21) | 4,193 | (8) | (8) |
| Base | 9,320 | 473 | (61) | 8,908 | 5 | 5 |
| Total | 26,475 | 2,613 | (88) | 23,950 | 11 | 11 |
OPERATING PROFIT (2006 AND 2005)
| 2006 | 2005 | Percentage of sales | 2006 compared to 2005 | |||||
|---|---|---|---|---|---|---|---|---|
| $m | Growth underlying $m |
Growth due to exchange effects $m |
$m |
2006 % |
2005 % |
Growth underlying % |
Growth reported % |
|
| Sales | 26,475 | 2,613 | (88) | 23,950 | 11 | 11 | ||
| Cost of sales | (5,559) | (188) | (15) | (5,356) | (21.0) | (22.4) | 4 | 4 |
| Gross margin | 20,916 | 2,425 | (103) | 18,594 | 79.0 | 77.6 | 13 | 13 |
| Distribution costs | (226) | (15) | - | (211) | (0.9) | (0.8) | 7 | 7 |
| Research and development | (3,902) | (532) | 9 | (3,379) | (14.7) | (14.1) | 16 | 16 |
| Selling, general and administrative | (9,096) | (410) | 9 | (8,695) | (34.4) | (36.3) | 5 | 5 |
| Other operating income and expense | 524 | 326 | 5 | 193 | 2.0 | 0.8 | 169 | 172 |
| Operating profit | 8,216 | 1,794 | (80) | 6,502 | 31.0 | 27.2 | 28 | 26 |
Underlying performance
Sales
Sales for the full year increased 11% at CER with good sales growth in all regions (US up 16%; Europe up 6%; Japan up 5%; Rest of World up 11%). This growth was driven by volume improvements that were offset by price reductions (particularly in the US and parts of Europe). Excluding Toprol-XL sales from both 2006 and 2005, growth was 11%.
The combined sales of five key 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). Patent expiry products represented around 14% of sales, down from 18% in 2005. Base products saw growth of 5% in 2006 over 2005 although the relative percentage of sales fell.
The Gastrointestinal portfolio grew by 4% as Nexium growth more than offset the continuing decline in Losec/Prilosec. Nexium sales increased by 12% to $5,182 million. 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/Prilosec sales were down 16% to $1,371 million.
In Cardiovascular, sales grew by 15% to $6,118 million. Crestor sales exceeded $2 billion, reaching $2,028 million, up 59%. Sales in the US were up 57% to $1,148 million. Sales in other markets increased by 61% on good growth in Europe and the second half launch in Japan. Seloken/Toprol-XL sales increased by 3% to $1,795 million. US sales growth was restricted to 7% by the launch in November of generic Toprol-XL 25mg by Sandoz (formerly Eon Labs). 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% to $3,151 million. Symbicort sales were the main driver of this growth and increased 18% to $1,184 million. Elsewhere in the therapy area, Pulmicort sales rose by 11% with annual sales of $1,292 million, whilst Rhinocort sales declined to $360 million, down by 7%.
Sales in the Oncology portfolio grew by 12% to $4,262 million. Arimidex sales increased 29% to $1,508 million. Casodex sales grew by 9% to $1,206 million, and Zoladex sales exceeded $1 billion for the second year in a row. Iressa sales fell by 11% to $237 million, as growth in Asia Pacific went some way to offset declines in the US.
Neuroscience sales grew by 16% to $4,704 million. Seroquel sales exceeded $3 billion to reach $3,416 million (up 24%).
Geographic analysis
In the US, sales were up 16%. Sales growth for Nexium, Seroquel, Arimidex and Crestor amounted to $1,441 million, whilst there were declines in products such as Prilosec. Toprol-XL grew in the year although it faced generic competition from November. 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 products combined grew by 21%. However, performance was hindered by declines in Germany, where doctors have been encouraged to prescribe generics.
Sales in Japan increased by 5% as a result of good growth for Casodex and Arimidex together with the launch of Crestor. Sales in China were up 19% to $328 million on the back of strong growth in all the major therapy 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 0.1 percentage points and 0.2 percentage points, respectively. Excluding the prior year costs for the early termination of the MedPointe Zomig US distribution agreement and manufacturing provisons (in total $134 million) and the 2006 provisions made in respect of Toprol-XL, NXY-059 and manufacturing efficiencies (in total $215 million), underlying margin improved by 1.5 percentage points.
R&D expenditure was up 16% to $3,902 million (14% excluding the Cambridge Antibody Technology investment) and increased by 0.6 percentage points to 14.7% of sales. Selling, general and administrative cost increases were restricted to 5% over the last year, reaching $9,096 million and 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 the $109 million gain recognised in the first half of the year from the divestment of the US anaesthetics and analgesic products to Abraxis BioScience Inc., and the disposal of non-core products in Scandinavia ($32 million) in the final quarter.
Included within cost of sales is the movement in fair value of financial instruments used to manage our transactional currency exposures; the loss for the year, net of an exchange gain on the underlying exposures, was $11 million. Other fair value movements of $5 million are charged elsewhere in operating profit.
Net interest and dividend income for the year was $327 million (2005 $165 million). The increase over 2005 is primarily attributable to higher average investment balances and yields. The reported amounts include $43 million (2005 $15 million) arising from employee benefit fund assets and liabilities reported under IAS 19, ‘Employee Benefits’.
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).
In 2006, Toprol-XL contributed US sales of $1,382 million and earnings per share of 50 cents. Since the timing of approval and launch of other proposed generic products (in addition to the 25mg launched by Sandoz) is difficult to predict, we believe that future performance can be best judged by excluding Toprol-XL from current performance. Consequently, if Toprol-XL were excluded from the current and prior years, sales growth would be 11% and earnings per share growth would be 36%.
