Financial Review

The following measures are referred to when reporting on our performance both in absolute terms but more often in comparison to earlier years in this Financial Review:

• Reported performance. Reported performance takes into account all the factors (including those which we cannot influence, principally currency exchange rates) that have affected the results of our business as reflected in our Group Financial Statements prepared in accordance with IFRS as adopted by the EU and as issued by the IASB.
• Core financial measures. These are non-GAAP measures because unlike Reported performance they cannot be derived directly from the information in the Group's Financial Statements. These measures are adjusted to exclude certain significant items, such as charges and provisions related to our global restructuring and synergy programmes, amortisation and impairment of the significant intangibles relating to the acquisition of MedImmune in 2007, the amortisation and impairment of the significant intangibles relating to our current and future exit arrangements with Merck in the US and other specified items. See the Reconciliation of Reported results to Core results table below for a reconciliation of Reported to Core performance.
• Constant exchange rate (CER) growth rates. These are also non-GAAP measures. These measures remove the effects of currency movements (by retranslating the current year's performance at previous year's exchange rates and adjusting for other exchange effects, including hedging). A reconciliation of the Reported results adjusted for the impact of currency movements is provided in the Operating profit (2009 and 2008) table below.
• Gross margin and operating profit margin percentages. These measures set out the progression of key performance margins and demonstrate the overall quality of the business.
• Prescription volumes and trends for key products. These measures can represent the real business growth and the progress of individual products better and more immediately than invoiced sales.
• Net Funds/Debt. This represents our interest bearing loans and borrowings, less cash and cash equivalents, current investments and derivative financial instruments.

CER measures allow us to focus on the changes in sales and expenses driven by volume, prices and cost levels relative to the prior period. Sales and cost growth expressed in CER allows management to understand the true local movement in sales and costs, in order to compare recent trends and relative return on investment. CER growth rates can be used to analyse sales in a number of ways but, most often, we consider CER growth by products and groups of products, and by countries and regions. CER sales growth can be further analysed into the impact of sales volumes and selling price. Similarly, CER cost growth helps us to focus on the real local change in costs so that we can manage the cost base effectively.

We believe that disclosing Core financial and growth measures in addition to our Reported financial information enhances investors' ability to evaluate and analyse the underlying financial performance of our ongoing business and the related key business drivers. The adjustments made to our Reported financial information in order to show Core financial measures illustrate clearly and on a year-on-year or period-by-period basis the impact upon our performance caused by factors such as changes in sales and expenses driven by volume, prices and cost levels relative to such prior years or periods.

Further, as shown in the Reconciliation of Reported results to Core results table below, our reconciliation of Reported financial information to Core financial measures includes a breakdown of the items for which our Reported financial information is adjusted and a further breakdown of those items by specific line item as such items are reflected in our Reported income statement, to illustrate the significant items that are excluded from Core financial measures and their impact on our Reported financial information, both as a whole and in respect of specific line items.

Management presents these results externally to meet investors' requirements for transparency and clarity. Core financial measures are also used internally in the management of our business performance, in our budgeting process and when determining compensation.

Core financial measures are non-GAAP, adjusted measures. All items for which Core financial measures are adjusted are included in our Reported financial information because they represent actual costs of our business in the periods presented. As a result, Core financial measures merely allow investors to differentiate among different kinds of costs and they should not be used in isolation. You should also refer to our Reported financial information in the Operating profit (2009 and 2008) table below, our reconciliation of Core financial measures to Reported financial information in the Reconciliation of Reported results to Core results table below, and to the Results of operations - summary analysis of year to 31 December 2008 section below for our discussion of comparative Reported growth measures that reflect all of the factors that affect our business. Our determination of non-GAAP measures, together with our presentation of them within this financial information, may differ from similarly titled non-GAAP measures of other companies.

The SET retains strategic management of the costs excluded from Reported financial information in arriving at Core financial measures, tracking their impact on Reported operating profit and EPS, with operational management being delegated on a case-by-case basis to ensure clear accountability and consistency for each cost category.

The business background is covered in the Business Environment section, Geographical Review and Therapy Area Review and describes in detail the developments in both our products and geographical regions.

Sales of our products are directly influenced by medical need and are generally paid for by health insurance schemes or national healthcare budgets. Our operating results can be affected by a number of factors other than the delivery of operating plans and normal competition which are:

• The adverse impact on pharmaceutical prices as a result of the regulatory environment. For instance, although there is no direct governmental control on prices in the US, action from individual state programmes and health insurance bodies is leading to downward pressures on realised prices. In other parts of the world, there are a variety of price and volume control mechanisms and retrospective rebates based on sales levels that are imposed by governments.
• The risk of generic competition following loss of patent protection or patent expiry or an 'at risk' launch by a competitor, with the potential adverse effects on sales volumes and prices, for example, the launch of generic competition to both Ethyol and Pulmicort Respules in 2008.
• The timings of new product launches, which can be influenced by national regulators and the risk that such new products do not succeed as anticipated, together with the rate of sales growth and costs following new product launches.
• Currency fluctuations. Our functional and reporting currency is the US dollar but we have substantial exposures to other currencies, in particular the euro, Japanese yen, pound sterling and Swedish krona.
• Macro factors such as greater demand from an ageing population and increasing requirements of servicing Emerging Markets.

Over the longer term, the success of our R&D is crucial, and we devote substantial resources to this area. The benefits of this investment emerge over the long term and there is considerable inherent uncertainty as to whether and when it will generate future products.

The most significant features of our financial results in 2009 are:

• Reported sales of $32,804 million, representing CER sales growth of 7% (Reported: 4%).
• Strong performance in Emerging Markets with CER sales growth of 12% (Reported: 2%).
• Excluded from Core results were specific legal provisions totalling $636 million (which impacted Reported results in the year). $524 million of this has been made in respect of the US Attorney's Office investigation into sales and marketing practices involving Seroquel and $112 million relates to average wholesale price litigation. These charges are excluded from Core performance results.
• Operating profit increased by 24% at CER (Reported: 26%). Core operating profit increased by 23% at CER (Reported: 24%). A reconciliation between these measures is included in the Reconciliation of Reported results to Core results table below.
• EPS of $5.19 represented an increase of 22% at CER (Reported: 24%). Core EPS of $6.32 represented an increase of 23% at CER (Reported: 24%).
• Net cash inflow from operating activities increased to $11,739 million (2008: $8,742 million).
• Dividends increased to $2,977 million (2008: $2,739 million).
• Net funds at 31 December were $535 million, an improvement of $7,709 million on net debt of $7,174 million in the previous year.
• Total restructuring and synergy costs associated with the global programme to reshape the cost base of the business, were $659 million in 2009 (2008: $881 million). This brings the total restructuring and synergy costs charged to date to $2,506 million.

The Sales by Therapy Area (2009 and 2008) table below shows our sales analysed by Therapy Area. The Operating profit (2009 and 2008) table below shows operating profit for 2009 compared to 2008. The Reconciliation of Reported results to Core results table below shows a reconciliation of Reported results to Core results for 2009 and 2008. More details on our sales performance by Therapy Area are given in the Therapy Area Review in the Performance 2009 sections.

Sales increased by 4% on a Reported basis and by 7% on a CER basis. Revenue benefited from strong growth of the Toprol-XL franchise in the US, as a result of the withdrawal from the market of two other generic metoprolol succinate products and from US government orders for the H1N1 influenza (swine flu) vaccine; adjusting for these factors, global revenue increased by 4%. AstraZeneca expects this impact to reduce as generic competitors re-enter the market. Revenue in Emerging Markets increased by 12% at CER.

Core gross margin of 83% for the full year was 2.4% higher than last year at CER (Reported: up 3.3%). Lower payments to Merck and continued efficiency gains and mix factors were partially offset by higher royalty payments resulting from higher volumes of sales of relevant products.

Core R&D expenditure was $4,334 million for the full year, 3% lower than last year at CER (Reported: down 15%), as increased investment in biologics was more than offset by the continued productivity initiatives and lower costs associated with late-stage development projects that have progressed to pre-registration.

Core SG&A costs of $9,890 million for the full year were 5% higher than last year at CER (Reported: up 4%). Stronger than expected revenue performance provided the opportunity to drive future growth through accelerated marketing investment for Emerging Markets and currently marketed brands, and to support launch planning for the new products awaiting registration. SG&A expense growth also included increased legal expenses and impairment of intangible assets related to information systems, which were only partially offset by operational efficiencies.

Core other income of $926 million was $192 million higher than 2008, chiefly as a result of the disposal of the co-promotion rights of Abraxane^™ and Nordic OTC portfolio disposals in the first half of the year.

Impairment charges relating to intangible fixed assets totalled $415 million during the year. Charges totalling $272 million, being the charges arising from impairments in respect of assets relating to our HPV cervical cancer vaccine income stream and other assets capitalised as part of the MedImmune acquisition have been excluded from Core results.

During the year, developments in several legal matters resulted in provisions totalling $636 million. Full details of these matters are included in Note 25 to the Financial Statements.

Restructuring and synergy costs totalling $659 million, incurred as the Group continues its previously announced efficiency programmes and amortisation totalling $511 million relating to assets capitalised as part of the MedImmune acquisition and the Merck partial retirement, which impacted Reported operating profit, were also excluded from Core performance.

Core operating profit was $13,621 million, an increase of 23% at CER (Reported: 26%). Core operating margin increased by 5.1% to 41.5% of revenue, as a result of sales growth, efficiencies across the cost base, lower R&D spend and the disposals within other income.

Net finance expense was $736 million for the year, versus $463 million in 2008. The principal factors contributing to this increase were the continued reversal of the fair value gain, reduced interest received due to lower interest rates and a higher net interest expense on pension obligations, partially offset by reduced interest payable on lower net debt balances.

Net finance expense included a net fair value loss of $145 million for the year (2008: $130 million gain) as credit spreads have reduced since the previous year end. The net fair value gain of $130 million recorded in the prior year, mainly related to two long-term bonds. These bonds are swapped to floating interest rates and accounted for using the fair value option under IFRS. Under this accounting treatment both the bonds and the related interest rate swaps are measured at fair value, with changes in fair value reported in the income statement. The fair value of each instrument reflects changes in market interest rates, which broadly offset, but the fair value of these bonds also reflects changes in credit spreads. The 2008 gain has now reversed fully in 2009 and, as credit spreads continued to reduce in the final quarter of 2009, further losses have been recorded.

The effective tax rate for the year is 30.2%. Excluding the impact of the $636 million legal provisions, the effective tax rate would be 28.8% (2008: 29.4%). A description of our tax exposures is set out in Note 25 to the Financial Statements.

Core EPS were $6.32, an increase of 23% at CER on 2008, as the increase in Core operating profit was partially offset by increased net finance expense. Reported EPS increased 24% to $5.19.

Total comprehensive income for the year increased by $3,266 million from 2008. This was principally due to an increase in profit for the period of $1,414 million, beneficial exchange rate impacts on consolidation of $1,365 million and reduced actuarial losses of $663 million compared to 2008.

Geographical analysis

We discuss the geographical performances in the Geographic Review.

Sales by Therapy Area (2009 and 2008)

	2009				2008		2009 compared to 2008
	Reported $m	CER growth $m	Growth due to exchange effects $m		Reported $m		CER growth %	Reported growth %
Cardiovascular	8,376	1,737	(324)		6,963		25	20
Gastrointestinal	6,011	(157)	(176)		6,344		(2)	(5)
Infection and other	2,631	257	(77)		2,451		10	7
Neuroscience	6,237	566	(166)		5,837		10	7
Oncology	4,518	(330)	(106)		4,954		(7)	(9)
Respiratory & Inflammation	4,132	234	(230)		4,128		6	-
Others businesses	899	10	(35)		924		1	(3)
Total	32,804	2,317	(1,114)		31,601		7	4

Operating profit (2009 and 2008)

	2009				2008		Percentage of sales			2009 compared to 2008
	Reported $m	CER growth $m	Growth due to exchange effects $m		Reported $m		Reported 2009 %	Reported 2008 %		CER growth %	Reported growth %
Sales	32,804	2,317	(1,114)		31,601					7	4
Cost of sales	(5,775)	540	283		(6,598)		(17.6)	(20.9)		(8)	(12)
Gross profit	27,029	2,857	(831)		25,003		82.4	79.1		11	8
Distribution costs	(298)	(37)	30		(291)		(0.9)	(0.9)		13	3
Research and development	(4,409)	298	472		(5,179)		(13.5)	(16.4)		(6)	(15)
Selling, general and administrative costs	(11,332)	(945)	526		(10,913)		(34.5)	(34.6)		9	4
Other operating income and expense	553	33	(4)		524		1.7	1.7		6	6
Operating profit	11,543	2,206	193		9,144		35.2	28.9		24	26
Net finance expense	(736)				(463)
Profit before tax	10,807				8,681
Taxation	(3,263)				(2,551)
Profit for the period	7,544				6,130
Earnings per share ($)	5.19				4.20

Growth rates on line items below operating profit, where meaningful, are given elsewhere in this Annual Report.

All data in this section is on a Reported basis (unless noted otherwise).

Net assets increased by $4,761 million to $20,821 million. The increase due to Group profit of $7,521 million was offset by dividends of $3,026 million. Exchange rate movements arising on consolidation and actuarial losses also reduced net assets during the year.

Property, plant and equipment

Property, plant and equipment increased by $264 million to $7,307 million primarily due to additions of $967 million and exchange rate movements of $391 million offset by depreciation and impairments of $943 million.

Goodwill and intangible assets

Goodwill and intangible assets have increased by $82 million to $22,115 million.

Goodwill principally arose on the acquisition of MedImmune and on the restructuring of our US joint venture with Merck in 1998. No goodwill has been capitalised in 2009.

Intangible assets have reduced by $97 million to $12,226 million. Additions totalled $1,003 million, amortisation was $729 million and impairments totalled $415 million. Exchange rate impacts increased intangible assets by $178 million.

Additions in 2009 included $300 million in respect of milestone payments made under our collaboration agreement with BMS, $200 million in respect of our agreement with Targacept, and $126 million in respect of our agreement with Nektar.

During 2009, impairments totalled $415 million. $150 million was impaired as a result of a reassessment of the licensing income generated by the HPV cervical cancer vaccine. Impairments of other assets acquired with MedImmune totalled $122 million. Impairments related to our acquisition of MedImmune and therefore excluded from our Core results totalled $272 million. In addition, $93 million was written off products in development.

Additions to intangible assets in 2008 included a payment made to Merck under pre-existing arrangements under which Merck's interests in our products in the US will be terminated (subject to the exercise of options beginning in 2010). As a result of the payment, AstraZeneca no longer has to pay contingent payments on these products. This payment includes $1,656 million in respect of payments on account for rights that will crystallise if we exercise future options. If AstraZeneca does not exercise these options certain rights will remain with Merck resulting in a write-off for any rights not acquired. Further details of this matter are included in Note 25 to the Financial Statements.

Reconciliation of Reported results to Core results

2009	Reported $m	Restructuring and synergy costs $m	Merck & MedImmune amortisation $m	Intangible impairments $m	Legal provisions $m	2009 Core $m
Gross margin	27,029	188	-	-	-	27,217
Distribution costs	(298)	-	-	-	-	(298)
Research and development	(4,409)	68	-	7	-	(4,334)
Selling, general and administrative costs	(11,332)	403	403	-	636	(9,890)
Other operating income and expense	553	-	108	265	-	926
Operating profit	11,543	659	511	272	636	13,621
Net interest	(736)	-	-	-	-	(736)
Profit before tax	10,807	659	511	272	636	12,885
Taxation	(3,263)	(199)	(125)	(82)	(34)	(3,703)
Profit for the period	7,544	460	386	190	602	9,182
Earnings per share ($)	5.19	0.32	0.27	0.13	0.41	6.32

2008	Reported $m	Restructuring and synergy costs $m	Merck & MedImmune amortisation $m	Intangible impairments $m	Legal provisions $m	2008 Core $m
Gross margin	25,003	405	-	-	-	25,408
Distribution costs	(291)	-	-	-	-	(291)
Research and development	(5,179)	166	-	60	-	(4,953)
Selling, general and administrative costs	(10,913)	310	406	257	-	(9,940)
Other operating income and expense	524	-	120	90	-	734
Operating profit	9,144	881	526	407	-	10,958
Net interest	(463)	-	-	-	-	(463)
Profit before tax	8,681	881	526	407	-	10,495
Taxation	(2,551)	(259)	(125)	(121)	-	(3,056)
Profit for the period	6,130	622	401	286	-	7,439
Earnings per share ($)	4.20	0.43	0.28	0.19	-	5.10

	2009				2008		2009 compared to 2008
2008 to 2009 Core result	Core $m	CER growth $m	Growth due to exchange effects $m		Core $m		CER growth %	Total Core growth %
Gross margin	27,217	2,660	(851)		25,408		10	7
Distribution costs	(298)	(37)	30		(291)		13	3
Research and development	(4,334)	150	469		(4,953)		(3)	(13)
Selling, general and administrative costs	(9,890)	(452)	502		(9,940)		5	(1)
Other operating income and expense	926	194	(2)		734		26	26
Operating profit	13,621	2,515	148		10,958		23	24
Net interest	(736)				(463)
Profit before tax	12,885				10,495
Taxation	(3,703)				(3,056)
Profit for the period	9,182				7,439
Earnings per share ($)	6.32				5.10

Inventories

Inventories have increased by $114 million to $1,750 million principally due to exchange rate impacts.

Receivables, payables and provisions

Trade and other receivables increased by $448 million to $7,709 million. Exchange rate movements increased receivables by $220 million. The underlying increase of $228 million was driven by increased sales in the final quarter and an increase in insurance recoverables.

As of 31 December, legal defence costs of approximately $656 million (2008: $512 million) have been incurred in connection with Seroquel-related product liability claims. The first $39 million is not covered by insurance. At 31 December, AstraZeneca has recorded an insurance receivable of $521 million (2008: $426 million) representing the maximum insurance receivable that AstraZeneca can recognise under applicable accounting principles at this time. This may increase over time as AstraZeneca believes that it is more likely than not that the vast majority of costs incurred to date in excess of $39 million will ultimately be recovered through this insurance, although there can be no assurance of additional coverage under the policies, or that the insurance receivable which we have recognised, will be realisable in full.

Trade and other payables increased by $1,604 million primarily due to increases in US managed market accruals, accruals in respect of intangibles investments made in the fourth quarter and other accruals. Trade and other payables include $2,618 million in respect of accruals relating to rebates and chargebacks in our US market. These are explained and reconciled fully in the Rebates, chargebacks and returns in the US section below, along with cash discounts and customer returns.

During the year AstraZeneca made a provision of $636 million in respect of various federal and state investigations and civil litigation matters relating to drug marketing and pricing practices. $524 million of this provision has been made in respect of the US Attorney's Office investigation into sales and marketing practices involving Seroquel with the remainder relating to average wholesale price litigation. Further details on these matters are included in Note 25 to the Financial Statements.

Tax payable and receivable

Net income tax payable has increased by $885 million to $2,853 million principally due to tax audit provisions, cash tax timing differences and exchange rate movements. Tax receivable largely comprises tax owing to AstraZeneca from certain governments expected to be received on settlements of transfer pricing audits and disputes (see Note 25 to the Financial Statements).

Retirement benefit obligations

Net retirement benefit obligations increased by $622 million principally as a result of actuarial losses of $569 million and adverse exchange rate effects of $215 million. Approximately 97% of the Group's obligations are concentrated in three countries. The following table shows the US dollar effect of a 1% change in the discount rate on the retirement benefit obligations in those countries.

	-1%	+1%
UK ($m)	1,129	(973)
US ($m)	256	(225)
Sweden ($m)	229	(192)
Total ($m)	1,614	(1,390)

Commitments and contingencies

The Group has commitments and contingencies which are accounted for in accordance with the accounting policies described in the Financial Statements in the Accounting Policies (Group) section. The Group also has taxation contingencies. These are described in the Taxation section in the Critical accounting policies section below. These matters are explained fully in Note 25 to the Financial Statements.

Cash flow

Cash generated from operating activities was $11,739 million in the year, compared with $8,742 million in 2008. The increase of $2,997 million was principally driven by an increase in operating profit before depreciation, amortisation and impairment costs of $1,866 million, offset by a decrease in non-cash items of $287 million, which includes fair value adjustments. An improvement in working capital flows, including short-term provisions of $1,539 million, which also contributed significantly to this increase, arose principally from an increase in returns and chargebacks provisions and the legal provisions made in the year.

Net cash outflows from investing activities were $2,476 million in the year compared with $3,896 million in 2008. The movement of $1,420 million is due primarily to the payment of $2,630 million to Merck in 2008 as part of the partial retirement, and the proceeds from the disposal of the Abraxane^™ co-promotion rights of $269 million received in 2009, countered by an increase in the purchase of short term investments and fixed deposits of $1,372 million.

Cash distributions to shareholders, through dividend payments, were $2,977 million.

Gross debt (including loans, short-term borrowings and overdrafts) was $11,063 million as at 31 December (2008: $11,848 million). Of this debt, $1,926 million is due within one year (2008: $993 million), which we currently anticipate repaying from current cash balances and short term investments of approximately $11.6 billion and business cash flows, without the need to re-finance.

Net funds of $535 million have improved by $7,709 million from net debt of $7,174 million at 31 December 2008.

We continue to believe that, although our future operating cash flows are subject to a number of uncertainties, as specified in the Business background and major events affecting 2009 section, our cash and funding resources will be sufficient to meet our forecast requirements for the foreseeable future, including developing and launching new products, externalisation, our ongoing capital programme, our restructuring programme, debt servicing and repayment, options arising under the Merck exit arrangements and shareholder distributions.

Net funds/(debt)

	2009 $m	2008 $m	2007 $m
Net (debt)/funds brought forward at 1 January	(7,174)	(9,112)	6,537
Earnings before interest, tax, depreciation, amortisation and impairment	13,630	11,764	9,950
Movement in working capital and provisions	1,329	(210)	(443)
Tax paid	(2,381)	(2,209)	(2,563)
Interest paid	(639)	(690)	(335)
Other non-cash movements	(200)	87	901
Net cash available from operating activities	11,739	8,742	7,510
Purchase of intangibles (net)	(355)	(2,944)	(549)
Other capital expenditure (net)	(824)	(1,057)	(1,076)
Acquisitions	-	-	(14,891)
Investments	(1,179)	(4,001)	(16,516)
Dividends	(2,977)	(2,739)	(2,641)
Net share issues/(re-purchases)	135	(451)	(3,952)
Distributions	(2,842)	(3,190)	(6,593)
Other movements	(9)	387	(50)
Net funds/(debt) carried forward at 31 December	535	(7,174)	(9,112)
Comprised of: Cash & short term investments	11,598	4,674	6,044
Loans and borrowings	(11,063)	(11,848)	(15,156)

Driving increased productivity from investments in R&D is a key to portfolio renewal and value creation. Further to this objective, AstraZeneca will undertake additional restructuring within the R&D function. These plans include a reduction in the number of disease area targets within our core therapeutic areas, some consolidation of our activities onto a smaller R&D site footprint, and other efficiency measures, subject to consultations with work councils, trades unions and other employee representatives and in accordance with local employment laws.

The next phase of restructuring which includes the completion of the previous programmes announced in 2007, will also include some additional initiatives in supply chain and in SG&A in addition to the R&D initiatives described above.

All data in this section is on a Reported basis.

Capitalisation

The total number of shares in issue at 31 December was 1,451 million. 3.5 million shares were issued in consideration of share option plans and employee share plans for a total of $135 million. Shareholders' equity increased by a net $4,748 million to $20,660 million at the year end. Minority interests increased to $161 million (2008: $148 million).

Dividend and share re-purchases

In recognition of the Group's strong balance sheet, sustainable significant cash flow and the Board's confidence in the strategic direction and long-term prospects for the business, the Board has adopted a progressive dividend policy, intending to maintain or grow the dividend each year.

In addition the Board has announced a share re-purchase programme.

Dividend for 2009

	$	Pence	SEK	Payment date
First interim dividend	0.59	36.0	4.41	14.09.09
Second interim dividend	1.71	105.4	12.43	15.03.10
Total	2.30	141.4	16.84

Summary of shareholder distributions

	Shares re-purchased (million)	Cost $m	Dividend per share $	Dividend cost $m	Shareholder distributions $m
2000	9.4	352	0.7	1,236	1,588
2001	23.5	1,080	0.7	1,225	2,305
2002	28.3	1,190	0.7	1,206	2,396
2003	27.2	1,154	0.795	1,350	2,504
2004	50.1	2,212	0.94	1,555	3,767
2005	67.7	3,001	1.3	2,068	5,069
2006	72.2	4,147	1.72	2,649	6,796
2007	79.9	4,170	1.87	2,740	6,910
2008	13.6	610	2.05	2,971	3,581
2009	-	-	2.30	3,3361	3,336
Total	371.9	17,916	13.075	20,336	38,252

¹

Total dividend cost estimated based upon number of shares in issue at 31 December 2009.

AstraZeneca is a focused, integrated, innovation-driven, global biopharmaceutical business. AstraZeneca will be selective about those areas of the industry it chooses to compete in, targeting those product categories where medical innovation or brand equity continues to command a premium in the marketplace. AstraZeneca believes the best way to capture value within this industry is to span the full value chain of discovery, development and commercialisation. AstraZeneca believes its technology base will continue to deliver innovative products that patients will need and for which payers will see value. AstraZeneca believes that its ability to meet the health needs of patients and healthcare systems in both developed and emerging markets is a core capability.

AstraZeneca believes that pursuit of this strategy will continue to build a pipeline of new medicines that will meet the needs of patients and provide attractive returns for shareholders.

The next five years will be challenging for the industry and for AstraZeneca, as its revenue base transitions through a period of exclusivity losses and new product launches. AstraZeneca believes it would be helpful for investors to understand AstraZeneca's high-level planning assumptions for revenue evolution, margin structure, cash flow and business reinvestment that will guide its management of the business over the next five years.

For the period 2010 to 2014, AstraZeneca has made certain assumptions for the industry environment. AstraZeneca assumes that the global pharmaceutical industry can grow at least in line with real GDP over the planning horizon. Downward pressure on revenue from government interventions in the marketplace, including certain proposals associated with efforts to enact US healthcare reform, remain a continuing feature of the challenging market environment. However, for the planning period, AstraZeneca assumes no further 'step-change' in the evolution of these pressures. As for assumptions specific to the Group, AstraZeneca assumes that there will be no material mergers, acquisitions or disposals. In addition, our plans assume no premature loss of exclusivity for key AstraZeneca products. It is also assumed that exchange rates for our principal currencies will not differ materially from the average rates that prevailed during January 2010.

It is expected that a significant portion of current base revenue will be affected by the loss of market exclusivity on a number of products. Revenue in 2010, for example, will be affected by the expected loss of market exclusivity for Arimidex and for Pulmicort Respules in the US. AstraZeneca aims to grow market share for key franchises that retain exclusivity, and plans to sustain double-digit growth rates in its Emerging Markets business, supported by the selective addition of branded generics to the portfolio.

In 2008 sales increased by 7% on a Reported basis and by 3% on a CER basis compared to 2007. Exchange rate movements benefited Reported sales by 4%. More details on our sales performance by Therapy Area are given in the Therapy Area Review in the Performance 2008 sections.

Core gross margin of 80.4% in 2008 was 0.8% higher than 2007 at CER (Reported: 79.1%; 0.8% higher). Principal drivers were lower payments to Merck (1.0%), continued efficiency gains and mix factors (1.2%), partially offset by higher royalty payments (0.6%) and intangible asset impairments and other provisions (0.8%).

Core R&D costs of $4,953 million were down 1% at CER in 2008 compared to 2007 (Reported: 0%). The inclusion of a full year of MedImmune expense was offset by improved productivity and efficiency, restructuring benefits, portfolio changes and lower charges relating to intangible asset impairments charged to Core R&D expense.

In 2008, Core SG&A costs of $9,940 million were up 3% at CER (Reported: 4%) due chiefly to the inclusion of a full year of MedImmune costs, increased investment in Emerging Markets and some higher legal expenses.

Core other income of $734 million was $6 million higher in 2008 compared to 2007 (Reported: decreased $204 million) with MedImmune's licensing and royalty income streams offset by expected lower one-time gains and royalty income.

Impairment charges relating to intangible fixed assets totalled $631 million in 2008. Charges totalling $407 million, including impairments in respect of Ethyol and HPV cervical cancer vaccines, were excluded from Core operating profit in 2008. Charges totalling $224 million, including $115 million in respect of Pulmicort Respules, were included in Core operating profit.

In 2008, Core operating profit was up 9% at CER from 2007 (Reported: 13%). CER Core operating margin increased by 1.6% to 34.7% of sales as improvements in gross margin were offset by higher SG&A costs. Reported operating profits, at 28.9%, increased by 1.5% compared with 2007 as a result of improvements in gross margin and R&D efficiencies which more than offset a modest increase in SG&A costs.

Net finance expense was $463 million in 2008 compared to $111 million for 2007.

In 2008, the increase in interest expense was driven by additional borrowings arising as a result of the acquisition of MedImmune in 2007. Our exposure to interest costs was reduced in 2008, from the closing position in 2007, as we moved debt used to finance the purchase of MedImmune from short-term, higher interest rate commercial paper, to longer-term debt financing at lower interest rates. The 2008 net finance expense benefited from a net fair value gain of $130 million relating to two long-term bonds due to widening credit spreads.

In 2008, the effective tax rate was 29.4% (2007: 29.5%).

In 2008, Core EPS were $5.10, an increase of 8% at CER on 2007, as the increase in Core operating profit and the benefit of a lower number of shares outstanding was partially offset by increased net finance expense. Reported EPS increased by 12% to $4.20.

Profit for the period totalled $6,130 million. Adverse exchange rate movements arising on consolidation of $1,336 million and actuarial losses in the year of $1,232 million resulted in a total comprehensive income for the year of $4,224 million.

Sales by Therapy Area (2008 and 2007)

	2008				2007		2008 compared to 2007
	Reported $m	CER growth $m	Growth due to exchange effects $m		Reported $m		CER growth %	Reported growth %
Cardiovascular	6,963	29	248		6,686		-	4
Gastrointestinal	6,344	(275)	176		6,443		(4)	(2)
Infection and other1	2,451	706	31		1,714		41	43
Neuroscience	5,837	346	151		5,340		6	9
Oncology	4,954	(109)	244		4,819		(2)	3
Respiratory & Inflammation	4,128	278	139		3,711		7	11
Other businesses	924	54	24		846		6	9
Total	31,601	1,029	1,013		29,559		3	7

¹

Includes Synagis and FluMist which were acquired in June 2007.

Operating profit (2008 and 2007)

	2008				2007		Percentage of sales			2008 compared to 2007
	Reported $m	CER growth $m	Growth due to exchange effects $m		Reported $m		Reported 2008 %	Reported 2007 %		CER growth %	Reported growth %
Sales	31,601	1,029	1,013		29,559					3	7
Cost of sales	(6,598)	38	(217)		(6,419)		(20.9)	(21.7)		(1)	3
Gross profit	25,003	1,067	796		23,140		79.1	78.3		5	8
Distribution costs	(291)	(39)	(4)		(248)		(0.9)	(0.8)		16	17
Research and development	(5,179)	(88)	71		(5,162)		(16.4)	(17.5)		2	-
Selling, general and administrative costs	(10,913)	(433)	(116)		(10,364)		(34.6)	(35.1)		4	5
Other operating income and expense	524	(188)	(16)		728		1.7	2.5		(26)	(28)
Operating profit	9,144	319	731		8,094		28.9	27.4		4	13
Net finance expense	(463)				(111)
Profit before tax	8,681				7,983
Taxation	(2,551)				(2,356)
Profit for the period	6,130				5,627
Earnings per share ($)	4.20				3.74

Growth rates on line items below operating profit, where meaningful, are given elsewhere in this Annual Report.

In 2008, total net assets increased by $1,145 million to $16,060 million. The increase due to Group profit of $6,101 million was offset by dividends of $2,767 million and net share re-purchases of $451 million. Exchange rate movements arising on consolidation and actuarial losses also reduced net assets during 2008.

In March 2008, AstraZeneca paid $2.6 billion to Merck. This payment resulted in AstraZeneca acquiring Merck's interests in certain AstraZeneca products including Pulmicort, Rhinocort, Symbicort and Toprol-XL and has been included in intangible assets as explained below.

Property, plant and equipment

In 2008, property, plant and equipment fell by $1,255 million to $7,043 million primarily due to depreciation and impairments of $1,182 million and exchange rate movements of $1,131 million offset by additions of $1,113 million.

Goodwill and intangible assets

In 2008, goodwill and intangible assets increased by $846 million to $22,197 million.

The main components within goodwill are the amounts capitalised on the acquisition of MedImmune of $8,757 million and on the restructuring of our US joint venture with Merck in 1998. No significant amounts were capitalised within goodwill in 2008. The total goodwill balance reduced by $10 million in 2008 due to exchange rate movements.

Intangible assets increased by $856 million to $12,323 million in 2008. Additions totalled $2,941 million, amortisation was $807 million and impairments totalled $631 million. Exchange rate movements in 2008 reduced intangible assets by $603 million.

Additions to intangible assets in 2008 included a payment made to Merck under pre-existing arrangements under which Merck's interests in our products in the US will be terminated (subject to the exercise of certain options). $994 million of this payment relates to certain AstraZeneca products, including Pulmicort, Rhinocort, Symbicort and Toprol-XL. As a result of the payment AstraZeneca no longer has to pay contingent payments on these products to Merck and has obtained the ability to fully exploit these products and to fully exploit other opportunities in the Respiratory Therapy Area that AstraZeneca was previously prevented from doing by Merck's interests in these products. The remainder of the payment ($1,656 million) represents payments on account for the product rights that will crystallise if we exercise options in 2010.

In March 2008, a $257 million intangible asset impairment charge was taken as a result of the entry of generic Ethyol, a product capitalised on the acquisition of MedImmune, into the US market. The settlement of the Pulmicort Respules patent litigation triggered an impairment of $115 million. The remaining impairments for 2008 resulted from the termination of projects in development and a charge for $91 million relating to the reassessment of the licensing income expected to be generated by the HPV cervical cancer vaccine. Reported performance for 2008 included impairments in respect of Ethyol, HPV cervical cancer vaccine and other projects in development (principally the return of rights to Infinity Pharmaceuticals) which management believed were not part of Core performance for 2008. As a result, management adjusted for impairments totalling $407 million in presenting Core performance.

Inventories

Inventories decreased in 2008 by $483 million to $1,636 million due to exchange rate movements of $298 million along with an underlying reduction in inventory of $185 million.

Receivables, payables and provisions

Trade and other receivables increased by $593 million to $7,261 million in 2008. Exchange rate movements reduced receivables by $429 million. The underlying increase of $1,022 million was driven by increased sales in Emerging Markets, the extension of major credit terms in the UK and increased insurance recoverables.

In 2008, trade and other payables increased by $130 million, or $675 million after removing the impacts of exchange rate movements, primarily due to increases in US managed market accruals. Trade payables include $2,136 million in respect of accruals relating to rebates and reductions in our US market.

Provisions in 2008 increased by $122 million driven mainly by increases in specific insurance and long-term provisions.

Tax payable and receivable

Net income tax payable in 2008 increased by $667 million to $1,968 million, principally due to tax audit provisions and cash tax timing differences. Net deferred tax liabilities decreased mainly as a result of the impact of actuarial losses suffered in the year, the amortisation and impairment of MedImmune intangible assets, and exchange rate benefits.

Retirement benefit obligations

Net retirement benefit obligations in 2008 increased by $734 million principally as a result of actuarial losses of $1,232 million offset by exchange rate benefits of $434 million. During 2008, approximately 95% of the Group's obligations were concentrated in three countries.

Cash flow

Cash generated from operating activities was $8,742 million in 2008 compared with $7,510 million in 2007. The increase of $1,232 million was principally driven by an increase in operating profit before depreciation, amortisation and impairment costs of $1,814 million, a decrease in tax payments of $354 million and lower working capital outflows of $233 million, offset by an increase in interest payments of $355 million and a decrease in non-cash items of $814 million, which includes movements on provisions.

Net cash outflows from investing activities were $3,896 million in 2008 compared with $14,887 million in 2007.

In 2008, cash distributions to shareholders were $3,349 million through dividend payments of $2,739 million and share re-purchases of $610 million.

During 2008 we issued a further €500 million, 5.625% 18-month bond as part of our re-financing programme, the proceeds of which were used to re-finance maturing commercial paper.

Gross debt (including loans, short-term borrowings and overdrafts) was $11,848 million at 31 December 2008 (2007: $15,156 million). Of this debt, $993 million was due within one year.

Net debt of $7,174 million decreased in 2008 by $1,938 million from 31 December 2007.

Investments, divestments and capital expenditure

The major product acquisitions in 2008 reflected our ongoing commitment to strengthening the product pipeline.

In 2007 AstraZeneca acquired MedImmune. On the acquisition of MedImmune, the purchase price for outstanding shares of $13.9 billion was allocated between intangible assets of $8.1 billion (including assets in respect of Synagis and motavizumab RSV franchise, FluMist, Ethyol and products in development), goodwill of $8.8 billion and net liabilities of $3.0 billion. This allocation, based on strict accounting requirements, does not allow for the separate recognition of valuable elements such as buyer-specific synergies, potential additional indications for identified products or the premium attributable to a well-established, highly-regarded business in the innovative biologics market. Such elements are instead subsumed within goodwill, which is not amortised. Further details of this acquisition are included in Note 22 to the Financial Statements.

Financial risk management policies

Insurance

Our risk management processes are described in the Managing risk section. These processes enable us to identify risks that can be partly or entirely mitigated through the use of insurance. We negotiate best available premium rates with insurance providers on the basis of our extensive risk management procedures. In the current insurance market, the level of cover is decreasing whilst premium rates are increasing. Rather than simply paying higher premiums for lower cover, we focus our insurance resources on the most critical areas, or where there is a legal requirement, and where we can get best value for money. Risks to which we pay particular attention include business interruption, Directors' and Officers' liability and property damage. Recently, insurance for product liability has not been available on commercially acceptable terms and the Group has not held product liability insurance since February 2006.

Taxation

Tax risk management forms an integrated part of the Group risk management processes. Our tax strategy is to manage tax risks and tax costs in a manner consistent with shareholders' best long-term interests, taking into account both economic and reputational factors. We draw a distinction between tax planning using artificial structures and optimising tax treatment of business transactions, and we engage only in the latter.

Treasury

The principal financial risks to which the Group is exposed are those arising from liquidity, interest rate, foreign currency and credit. The Group has a centralised treasury function to manage these risks in accordance with Board-approved policies. Specifically, liquidity risk is managed through maintaining access to a number of sources of funding to meet anticipated funding requirements, including committed bank facilities and cash resources. Interest rate risk is managed through maintaining a debt portfolio that is weighted towards fixed rates of interest. Accordingly the Group's net interest charge is not significantly affected by movements in floating rates of interest. We do not currently hedge the impact on earnings and cash flow of changes in exchange rates, with the exception of the currency exposure that arises between the booking and settlement dates on non-local currency purchases and sales by subsidiaries and the external dividend, along with certain non-US dollar debt. Credit risk is managed through setting and monitoring credit limits appropriate for the assessed risk of the counterparty.

Our capital and risk management objectives and policies are described in further detail in Note 15 to the Financial Statements and in the Managing risk section.

Sensitivity analysis of the Group's exposure to exchange rate and interest rate movements is detailed in Note 16 to the Financial Statements.

Our Financial Statements are prepared in accordance with IFRS as adopted by the EU (adopted IFRS) and as issued by the IASB, and the accounting policies employed are set out in the Accounting Policies (Group) section in the Financial Statements. In applying these policies, we make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities. The actual outcome could differ from those estimates. Some of these policies require a high level of judgement because the areas are especially subjective or complex. We believe that the most critical accounting policies and significant areas of judgement and estimation are in:

• Revenue recognition
• Research and development
• Goodwill and intangible assets
• Litigation
• Post-retirement benefits
• Taxation
• Segmental reporting.

Revenue recognition

Revenue is recorded at the invoiced amount (excluding inter-company sales and value added taxes) less movements in estimated accruals for rebates and chargebacks given to managed-care and other customers and product returns - a particular feature in the US. The impact in the rest of the world is not significant. It is the Group's policy to offer a credit note for all returns and to destroy all returned stock in all markets. Cash discounts for prompt payment are also deducted from sales. Revenue is recognised at the point of delivery, which is usually when title passes to the customer either on shipment or on receipt of goods by the customer depending on local trading terms. Income from royalties and from disposals of intellectual property, brands and product lines is included in other operating income.

Rebates, chargebacks and returns in the US

At the time of invoicing sales in the US, rebates and chargebacks that we expect to pay, in as little time as two weeks or as much as eight months, are estimated. These rebates typically arise from sales contracts with third party managed-care organisations, hospitals, long-term care facilities, group purchasing organisations and various federal or state programmes (Medicaid 'best price' contracts, supplemental rebates etc) and can be classified as follows:

• Chargebacks, where we enter into arrangements under which certain parties, typically hospitals, the Department of Veterans Affairs and the Department of Defense, are able to buy products from wholesalers at the lower prices we have contracted with them. The chargeback is the difference between the price we invoice to the wholesaler and the contracted price charged by the wholesaler. Chargebacks are paid directly to the wholesalers.
• Regulatory, including Medicaid and other federal and state programmes, where we pay rebates based on the specific terms of agreements in individual states, which include product usage and information on best prices and average market prices benchmarks.
• Contractual, under which entities such as third party managed-care organisations, long-term care facilities and group purchasing organisations are entitled to rebates depending on specified performance provisions, which vary from contract to contract.

The effects of these deductions on our US pharmaceuticals turnover are set out below.

Accrual assumptions are built up on a product-by-product and customer-by-customer basis, taking into account specific contract provisions coupled with expected performance, and are then aggregated into a weighted average rebate accrual rate for each of our products. Accrual rates are reviewed and adjusted on a monthly basis. There may be further adjustments when actual rebates are invoiced based on utilisation information submitted to us (in the case of contractual rebates) and claims/invoices are received (in the case of regulatory rebates and chargebacks). We believe that we have been reasonable in our estimates for future rebates using a similar methodology to that of previous years. Inevitably, however, such estimates involve judgements on aggregate future sales levels, segment mix and the customer's contractual performance.

Cash discounts are offered to customers to encourage prompt payment. Accruals are calculated based on historical experience and are adjusted to reflect actual experience.

Industry practice in the US allows wholesalers and pharmacies to return unused stocks within six months of, and up to 12 months after, shelf-life expiry. The customer is credited for the returned product by the issuance of a credit note. Returned product is not exchanged for product from inventory and once a return claim has been determined to be valid and a credit note has been issued to the customer, the returned goods are destroyed and not resold. At the point of sale in the US, we estimate the quantity and value of goods which may ultimately be returned. Our returns accruals in the US are based on actual experience. Our estimate is based on the preceding 12 months for established products together with market-related information, such as estimated stock levels at wholesalers and competitor activity, which we receive via third-party information services. For newly launched products, we use rates based on our experience with similar products or a pre-determined percentage.

For products facing generic competition (such as Ethyol and Toprol-XL in the US) our experience is that we usually lose the ability to estimate the levels of returns from wholesalers with the same degree of precision that we can for products still subject to patent protection. This is because we have limited or no insight into a number of areas - the actual timing of the launch of a generic competitor following regulatory approval of the generic product (for example, a generic manufacturer may or may not have produced adequate pre-launch inventory), the pricing and marketing strategy of the competitor, the take-up of the generic and (in cases where a generic manufacturer has approval to launch just one dose size in a market of several dose sizes) the likely level of switching from one dose to another. Under our accounting policy, revenue is recognised only when the amount of the revenue can be measured reliably. Our approach in meeting this condition for products facing generic competition will vary from product to product depending on the specific circumstances.

The movements on US pharmaceuticals revenue accruals are set out below.

The adjustments in respect of prior years benefited Reported US pharmaceuticals turnover by 0.24% in 2007, and decreased turnover by 1% in 2008.

We have distribution service agreements with major wholesaler buyers, which serve to reduce the speculative purchasing behaviour of the wholesalers and reduce short-term fluctuations in the level of inventory they hold. We do not offer any incentives to encourage wholesaler speculative buying and attempt, where possible, to restrict shipments to underlying demand when such speculation occurs.

Gross to net sales

	2009 $m	2008 $m	2007 $m	2006 $m
Gross sales	22,641	20,029	18,456	16,577
Chargebacks	(1,841)	(1,726)	(1,130)	(975)
Regulatory - US government and state programmes	(1,357)	(1,005)	(732)	(532)
Contractual - Managed-care and group purchasing organisation rebates	(4,753)	(3,658)	(3,179)	(2,413)
Cash and other discounts	(428)	(390)	(356)	(329)
Customer returns	(187)	(48)	(18)	(46)
Other	(196)	(167)	(145)	(256)
Net sales	13,879	13,035	12,896	12,026

Movement in provisions

	Brought forward at 1 January 2009 $m	Provision for current year $m	Adjustment in respect of prior years $m	Returns and payments $m	Carried forward at 31 December 2009 $m
Chargebacks	359	1,947	(106)	(1,804)	396
Regulatory - US government and state programmes	520	1,373	(16)	(1,102)	775
Contractual - Managed-care and group purchasing organisation rebates	1,084	4,732	20	(4,389)	1,447
Cash and other discounts	39	428	-	(426)	40
Customer returns	77	194	(2)	(93)	177
Other	57	198	(2)	(194)	59
Total	2,136	8,871	(106)	(8,009)	2,895

	Brought forward at 1 January 2008 $m	Provision for current year $m	Adjustment in respect of prior years $m	Returns and payments $m	Carried forward at 31 December 2008 $m
Chargebacks	186	1,745	(19)	(1,553)	359
Regulatory - US government and state programmes	428	997	8	(913)	520
Contractual - Managed-care and group purchasing organisation rebates	900	3,622	36	(3,474)	1,084
Cash and other discounts	38	390	-	(389)	39
Customer returns	85	48	-	(56)	77
Other	53	167	-	(163)	57
Total	1,690	6,969	25	(6,548)	2,136

	Brought forward at 1 January 2007 $m	Additions in respect of MedImmune $m	Provision for current year $m	Adjustment in respect of prior years $m	Returns and payments $m	Carried forward at 31 December 2007 $m
Chargebacks	92	2	1,115	15	(1,038)	186
Regulatory - US government and state programmes	314	69	769	(37)	(687)	428
Contractual - Managed-care and group purchasing organisation rebates	635	5	3,100	79	(2,919)	900
Cash and other discounts	29	1	356	-	(348)	38
Customer returns	160	1	19	(1)	(94)	85
Other	47	-	153	-	(147)	53
Total	1,277	78	5,512	56	(5,233)	1,690

Royalty income

Royalty income is recorded under other operating income in the Financial Statements. Royalties tend to be linked to levels of sales or production by a third party. At the time of preparing the Financial Statements, we may have to estimate the third party's sales or production when arriving at the royalty income to be included. These estimates, which may differ from actual sales or production, do not result in a material impact on Reported other operating income.

Sales of intangible assets

A consequence of charging all internal R&D expenditure to the income statement in the year in which it is incurred (which is normal practice in the pharmaceutical industry) is that we own valuable intangible assets which are not recorded on the balance sheet. We also own acquired intangible assets which are included on the balance sheet. As a consequence of regular reviews of product strategy, from time to time we sell such assets and generate income. Sales of product lines are often accompanied by an agreement on our part to continue manufacturing the relevant product for a reasonable period (often about two years) whilst the purchaser constructs its own manufacturing facilities. The contracts typically involve the receipt of an upfront payment, which the contract attributes to the sale of the intangible assets, and ongoing receipts, which the contract attributes to the sale of the product we manufacture. In cases where the transaction has two or more components, we account for the delivered item (for example, the transfer of title to the intangible asset) as a separate unit of accounting and record revenue on delivery of that component provided that we can make a reasonable estimate of the fair value of the undelivered component. Where the fair market value of the undelivered component (for example, a manufacturing agreement) exceeds the contracted price for that component we defer an appropriate element of the upfront consideration and amortise this over the performance period. However, where the fair market value of the undelivered component is equal to or lower than the contracted price for that component we treat the whole of the upfront amount as being attributable to the delivered intangible assets and recognise that part of the revenue upon delivery. No element of the contracted revenue related to the undelivered component is allocated to the sale of the intangible asset. This is because the contracted revenue relating to the undelivered component is contingent on future events (such as sales) and so cannot be anticipated.

Research and Development

Our business is underpinned by our marketed products and development portfolio. The R&D expenditure on internal activities to generate these products is generally charged to the income statement in the year that it is incurred. Purchases of intellectual property and product rights to supplement our R&D portfolio are capitalised as intangible assets. Such intangible assets are amortised from the launch of the underlying products and are tested for impairment both before and after launch. This policy is in line with practice adopted by major pharmaceutical companies.

Impairment testing of goodwill and intangible assets

We have significant investments in goodwill and intangible assets as a result of acquisitions of businesses and purchases of assets, such as product development and marketing rights.

For the purpose of impairment testing of goodwill, the Group is regarded as a single cash-generating unit.

The recoverable amount is based on value in use, using discounted risk-adjusted projections of the Group's pre-tax cash flows over 10 years, a period reflecting the average patent-protected lives of our current products. The projections include assumptions about product launches, competition from rival products and pricing policy as well as the possibility of generics entering the market. In setting these assumptions we consider our past experience, external sources of information (including information on expected increases and ageing of the populations in Established Markets and the expanding patient population in newer markets), our knowledge of competitor activity and our assessment of future changes in the pharmaceutical industry. The 10-year period is covered by internal budgets and forecasts. Given that internal budgets and forecasts are prepared for all projections, no general growth rates are used to extrapolate internal budgets and forecasts for the purposes of determining value in use.

In arriving at value in use, we disaggregate our projected pre-tax cash flows into groups reflecting similar risks and tax effects. For each group of cash flows we use an appropriate discount rate reflecting those risks and tax effects. In arriving at the appropriate discount rate for each group of cash flows, we adjust AstraZeneca's post-tax weighted average cost of capital (7.6% for 2009) to reflect the impact of risks and tax effects. The weighted average pre-tax discount rate we used was approximately 14%.

As a cross-check, we compare our market capitalisation to the book value of our net assets and this indicates significant surplus at 31 December.

No goodwill impairment was identified.

The Group has also performed sensitivity analysis calculations on the projections used and discount rate applied. The Directors have concluded that, given the significant headroom that exists, and the results of the sensitivity analysis performed, there is no significant risk that reasonable changes in key assumptions will cause the carrying value of goodwill to exceed its value in use.

Impairment reviews have been carried out on all intangible assets that are in development (and not being amortised), all major intangible assets acquired during the year, all intangible assets that have had indications of impairment during the year and all intangible assets recognised on the acquisition of MedImmune. Sales forecasts and specific allocated costs (which have both been subject to appropriate senior management sign-off) are discounted using AstraZeneca's risk-adjusted pre-tax weighted average cost of capital.

The majority of our investments in intangible assets and goodwill arose from the restructuring of the joint venture with Merck in 1998 and 2008, the acquisition of MedImmune in 2007 and the payment to partially retire Merck's interests in our products in the US in 2008, and we are satisfied that the carrying values are fully justified by estimated future cash flows.

Litigation

In the normal course of business, contingent liabilities may arise from product-specific and general legal proceedings, from guarantees or from environmental liabilities connected with our current or former sites. Where we believe that potential liabilities have a less than 50% probability of crystallising or are very difficult to quantify reliably, we treat them as contingent liabilities. These are not provided for but are disclosed in Note 25 to the Financial Statements.

In cases that have been settled or adjudicated, or where quantifiable fines and penalties have been assessed and which are not subject to appeal (or other similar forms of relief), or where a loss is probable and we are able to make a reasonable estimate of the loss, we indicate the loss absorbed or the amount of the provision accrued.

AstraZeneca is defending its interests in various federal and state investigations and civil litigation matters relating to drug marketing and pricing practices and in respect of which AstraZeneca has made an aggregate provision of $636 million in the year. $524 million of this provision has been made in respect of the US Attorney's Office's investigation into sales and marketing practices involving Seroquel, with the remainder relating to average wholesale price litigation pending in the US federal court. The current status of these matters is described more fully in Note 25 to the Financial Statements. This provision constitutes our best estimate at this time of the losses expected for these matters.

Where it is considered that the Group is more likely than not to prevail, legal costs involved in defending the claim are charged to profit as they are incurred. Where it is considered that the Group has a valid contract which provides the right to reimbursement (from insurance or otherwise) of legal costs and/or all or part of any loss incurred or for which a provision has been established, we consider recovery to be virtually certain and the best estimate of the amount expected to be received is recognised as an asset.

At 31 December legal defence costs of approximately $656 million have been incurred in connection with Seroquel-related product liability claims. The first $39 million is not covered by insurance. At 31 December AstraZeneca has recorded an insurance receivable of $521 million (2008: $426 million) representing the maximum insurance receivable that AstraZeneca can recognise under applicable accounting principles at this time. This amount may increase as AstraZeneca believes that it is more likely than not that the vast majority of costs above the $521 million recorded as an insurance receivable will ultimately be recovered through this insurance, although there can be no assurance of additional coverage under the policies, or that the insurance receivable we have recognised will be realisable in full.

Assessments as to whether or not to recognise provisions or assets and of the amounts concerned usually involve a series of complex judgements about future events and can rely heavily on estimates and assumptions. AstraZeneca believes that the provisions recorded are adequate based on currently available information and that the insurance recoveries recorded will be received. However, given the inherent uncertainties involved in assessing the outcomes of these cases and in estimating the amount of the potential losses and the associated insurance recoveries, we could in future periods incur judgments or insurance settlements that could have a material adverse effect on our results in any particular period.

The position could change over time, and there can, therefore, be no assurance that any losses that result from the outcome of any legal proceedings will not exceed the amount of the provisions that have been booked in the accounts.

Although there can be no assurance regarding the outcome of legal proceedings, we do not currently expect them to have a material adverse effect on our financial position, but they could significantly affect our Reported financial results in any particular period.

Post-retirement benefits

We offer post-retirement benefit plans which cover many of our employees around the world. In keeping with local terms and conditions, most of these plans are 'defined contribution' in nature, where the resulting income statement charge is fixed at a set level or is a set percentage of employees' pay. However, several plans, mainly in the UK (which has by far the largest single scheme), the US and Sweden, are defined benefit plans where benefits are based on employees' length of service and final salary (typically averaged over one, three or five years). The UK and US defined benefit schemes were closed to new entrants in 2000. All new employees in these countries are offered defined contribution schemes.

In applying IAS 19 'Employee Benefits', we recognise all actuarial gains and losses immediately through reserves. This methodology results in a less volatile income statement charge than under the alternative approach of recognising actuarial gains and losses over time. Investment decisions in respect of defined benefit schemes are based on underlying actuarial and economic circumstances with the intention of ensuring that the schemes have sufficient assets to meet liabilities as they fall due, rather than meeting accounting requirements. The trustees follow a strategy of awarding mandates to specialist, active investment managers, which results in a broad diversification of investment styles and asset classes. The investment approach is intended to produce less volatility in the plan asset returns.

In assessing the discount rate applied to the obligations, we have used rates on AA corporate bonds with durations corresponding to the maturities of those obligations.

In all cases, the pension costs recorded in the Financial Statements are assessed in accordance with the advice of independent qualified actuaries but require the exercise of significant judgement in relation to assumptions for future salary and pension increases, long-term price inflation and investment returns.

Taxation

Accruals for tax contingencies require management to make judgements and estimates in relation to tax audit issues and exposures. Amounts accrued are based on management's interpretation of country-specific tax law and the likelihood of settlement. Tax benefits are not recognised unless the tax positions are probable of being sustained. Once considered to be probable, management reviews each material tax benefit to assess whether a provision should be taken against full recognition of the benefit on the basis of potential settlement through negotiation and/or litigation. All such provisions are included in creditors due within one year. Any recorded exposure to interest on tax liabilities is provided for in the tax charge.

AstraZeneca faces a number of transfer pricing audits in jurisdictions around the world and, in some cases, is in dispute with the tax authorities. These disputes usually result in taxable profits being increased in one territory and correspondingly decreased in another. Our balance sheet positions for these matters reflect appropriate corresponding relief in the territories affected. The total net accrual included in the Financial Statements to cover the worldwide exposure to transfer pricing audits is $2,327 million, an increase of $699 million, which is due to a number of new audits, revisions of estimates relating to existing audits, offset by a number of negotiated settlements and exchange rate effects.

Included in the total net accrual are amounts in respect of the following transfer pricing arrangements:

• AstraZeneca and Her Majesty's Revenue & Customs (HMRC) have made a joint referral to the UK Court in respect of transfer pricing between our UK operation and one of our overseas operations for the years 1996 to date as there continues to be a material difference between the Group's and HMRC's positions. An additional referral in respect of controlled foreign company aspects of the same case was made during 2008. Absent a negotiated settlement, litigation is set to commence in 2010.
• AstraZeneca has applied for an advance pricing agreement in relation to intra-group transactions between the UK and the US which is being progressed through competent authority proceedings under the relevant double tax treaty.

Management continues to believe that AstraZeneca's positions on all its transfer pricing audits and disputes are robust and that AstraZeneca is appropriately provided.

For transfer pricing audits where AstraZeneca and the tax authorities are in dispute, AstraZeneca estimates the potential for reasonably possible additional losses above and beyond the amount provided to be up to $575 million. However, management believes that it is unlikely that these additional losses will arise. Of the remaining tax exposures, AstraZeneca does not expect material additional losses. It is not possible to estimate the timing of tax cash flows in relation to each outcome, however, it is anticipated that a number of significant disputes may be resolved over the next one to two years. Included in the provision is an amount of interest of $565 million.

Segmental reporting

During the year AstraZeneca has adopted IFRS 8 'Operating Segments'. IFRS 8 requires an entity to report financial and descriptive information about its reportable segments. Reportable segments are operating segments or aggregations of operating segments that meet specified criteria. In addressing these criteria, it was determined that AstraZeneca is engaged in a single business activity of pharmaceuticals and that the Group does not have multiple operating segments. Our biopharmaceuticals business consists of the discovery and development of new products, which are then manufactured, marketed and sold. All of these functional activities take place (and are managed) globally on a highly integrated basis. We do not manage these individual functional areas separately.

We consider that the SET is AstraZeneca's chief operating decision-making body (as defined by IFRS 8). The operation of the SET is principally driven by the management of the commercial operations, R&D and manufacturing and supply. The SET also includes Finance, Human Resources and General Counsel representation.

All significant operating decisions are taken by the SET. While members of the SET have responsibility for implementation of decisions in their respective areas, operating decision-making is at SET-level as a whole. Where necessary, decisions are implemented through cross-functional sub-committees that consider the group-wide impact of a new decision. For example, product launch decisions would be initially considered by the SET and, on approval, passed to an appropriate sub-team for implementation. The impacts of being able to develop, produce, deliver and commercialise a wide range of pharmaceutical products drive the SET's decision-making process.

In assessing performance, the SET reviews financial information on an integrated basis for the Group as a whole, substantially in the form of, and on the same basis as, the Group's IFRS Financial Statements. The high upfront cost of discovering and developing new products, coupled with the relatively insignificant and stable unit cost of production, means that there is not the clear link that exists in many manufacturing businesses between the revenue generated on an individual product sale and the associated cost (and hence margin) generated on a product. Consequently, the profitability of individual drugs or classes of drugs is not considered a key measure of performance for the business and is not monitored by the SET.

Resources are allocated on a group-wide basis according to need. In particular, capital expenditure, in-licensing and R&D resources are allocated between activities on merit, based on overall therapeutic considerations and strategy under the aegis of the Group's R&D Executive Committee to facilitate a group-wide single combined discovery and development strategy. The Group's recent acquisitions in the biologics area, MedImmune and Cambridge Antibody Technology Group plc, have been integrated into the existing management structure of AstraZeneca both for allocation of resources and for the purposes of assessment and monitoring of performance. As such, although biologics is a relatively new technological area for the Group, it does not operate as a separate operating segment.

Off-balance sheet transaction and commitments

We have no off-balance sheet arrangements and our derivative activities are non-speculative. The table below sets out our minimum contractual obligations at the year end.

Payments due by period

	Less than 1 year $m	1-3 years $m	3-5 years $m	Over 5 years $m	Total $m
Bank loans and other borrowings	2,512	2,769	834	12,209	18,324
Operating leases	132	128	80	131	471
Contracted capital expenditure	739	-	-	-	739
Total	3,383	2,897	914	12,340	19,534

New accounting standards

New IFRS which have been issued (both adopted and not yet adopted) are discussed in the Accounting Policies (Group) section in the Financial Statements.

Sarbanes-Oxley Act section 404

As a consequence of our listing on the NYSE, AstraZeneca is required to comply with those provisions of the Sarbanes-Oxley Act applicable to foreign issuers. Section 404 of the Sarbanes-Oxley Act requires companies annually to assess and make public statements about the quality and effectiveness of their internal control over financial reporting.

Our approach to the assessment has been to select key transaction and financial reporting processes in our largest operating units and a number of specialist areas, such as financial consolidation and reporting, treasury operations and taxation, so that, in aggregate, we have covered a significant proportion of each of the key line items in our Financial Statements. Each of these operating units and specialist areas has ensured that its relevant processes and controls are documented to appropriate standards, taking into account, in particular, the guidance provided by the SEC. We have also reviewed the structure and operation of our 'entity level' control environment. This refers to the overarching control environment, including structure of reviews, checks and balances that are essential to the management of a well-controlled business.

The Directors have concluded that our internal control over financial reporting is effective at 31 December and the assessment is set out in the Directors' Responsibilities for, and Report on, Internal Control over Financial Reporting section in the Financial Statements. KPMG has audited the effectiveness of our internal control over financial reporting and, as noted in the Auditor's Report on the Financial Statements and on Internal Control over Financial Reporting (Sarbanes-Oxley Act Section 404), their report is unqualified.