AstraZeneca Annual Report and Form 20-F Information 2011

Our goal is to create sustainable value for shareholders by being one of the best-performing biopharmaceutical companies. To achieve that goal, the pace of change across AstraZeneca needs to accelerate and we need to deliver on the following medium-term strategic priorities.

Pipeline

We are transforming our R&D organisation. We have streamlined and refocused our product portfolio, introduced a new operating model, and simplified our site footprint. We continue to focus on improving the quantity and quality of R&D output, by building industry-leading capabilities in critical areas and a more outward-looking organisation, which accesses the best science, regardless of origin.

While we are confident that long-term growth in demand for innovative biopharmaceuticals will remain strong, it is clear that substantial improvement in R&D productivity is needed if we are to sustain acceptable returns to shareholders. We are therefore accelerating our R&D strategy. We are pioneering innovative ways of conducting research. Neuroscience is a challenging field of medical science with high unmet need, and one that a number of our competitors have chosen to exit. To reinvigorate our efforts in this therapeutic area, we plan to create a virtual innovative medicines unit (iMed) in which a small group of scientists discover and develop a full pipeline of medicines, working with external partners and collaborators. They would replace our current scientific and laboratory resources. Alongside this, we plan to create a simpler, leaner, more flexible organisation through a variety of steps, which better support a more focused portfolio.

Deliver the business

At a time when many companies are exiting primary care, AstraZeneca is distinctive for combining a broad portfolio of primary and specialty care products with a global reach. We will continue to build on our leading positions in Established Markets and to introduce innovative ways of serving our customers, using digital and telephone channels, service teams, and desk-based medical support. We will invest in growth opportunities, including brands such as Crestor and Brilinta/Brilique and markets such as Japan and China. We will drive sales of our leading products which no longer benefit from patent protection where we retain brand equity and can command prices which reflect the quality and value of our brand. In addition, we will pursue further growth in Emerging Markets by expanding the population we serve, supplementing our patented innovative products with branded generic products sourced externally and marketed under the AstraZeneca brand. To further strengthen revenues, we will accelerate our efforts to secure late-stage/on-market product licensing, acquisition, and peer collaboration opportunities.

Across the Group, we are investing in our ability to meet the needs of those who pay for our medicines. In R&D, our new payer evidence group is ensuring that, as we develop our medicines, we gather not only the clinical data required for regulatory approval, but also the health economics, cost/benefit information and ‘value-in-use’ data required by payers. Our HealthCore and IMS collaborations will gather real world evidence about the comparative effectiveness of our products. This capability helps us to gain global reimbursement, broad market access and optimal pricing for our medicines.

Business shape

Given the pressures in the external environment, we will continue to simplify the business. Simplification means not only cost reduction, but also streamlining processes and shifting to a more flexible cost base. In our Commercial organisation, we are simplifying our operating model. We are consolidating the business into three regions: the Americas, EMEA, and Asia-Pacific, running the global and regional organisations from three sites (Wilmington, US, London, UK, and Shanghai, China), and changing our Established Markets footprint in line with declining sales. Following the success of our Nordic and Central American clusters, we are creating further country clusters, to share resources and expertise more effectively. Across our Supply and Manufacturing function, we continue to drive efficiencies through our business improvement programmes, and to use outsourcing and partnering to increase flexibility. We are also consolidating many of our support services into shared services, driving Lean process improvements, investing in automation and new global systems. We are outsourcing selected activities to specialist third party providers in low cost locations.

People

Talented, motivated and capable people are critical to the successful achievement of our strategic ambitions. We are focused on four key people priorities, as we lead through significant change in the business:

  • acquiring and retaining key capabilities and talent
  • further developing leadership and management capabilities
  • improving the strength and diversity of the talent pipeline
  • improving employee engagement.

Responsible business

We reviewed and reshaped our corporate responsibility priority action plan during the year, taking into account our strategy, insights gained from dialogue with stakeholders, and our internal risk assessment. Our new Responsible Business Plan, launched in April 2011, reflects our commitment to enhancing the sustainability of our business by operating responsibly. It underpins our work and provides the framework for applying integrity and high ethical standards across all our activities.

The Responsible Business Plan’s objectives are closely aligned to our business strategy. We have given the highest priority to those areas most impacted by our strategic priorities, including sales and marketing practices, access to healthcare, research ethics (including animal welfare), human rights, and supplier management. At the same time we have not lost sight of other significant aspects of our corporate responsibility, such as patient safety and the environment. The Responsible Business Plan is overseen by a Responsible Business Council of senior leaders from within our organisation.

Restructuring

Since 2007, we have undertaken significant efforts to restructure and reshape our business to improve long-term competitiveness. The first phase is complete. It comprised total restructuring costs of $2.5 billion and delivered $2.4 billion in annual benefits by the end of 2010, with a gross headcount reduction of 12,600.

The second phase, which featured a significant change programme in R&D, began in 2010 and was largely completed during 2011. The cost phase of this programme totalled $2.1 billion and is expected to deliver total annual benefits of $1.9 billion by the end of 2014, of which $1 billion had been achieved by the end of 2011. Gross headcount reductions associated with this second phase will be around 9,000.

Both restructuring programmes delivered their targeted benefits to date. We have invested some of the savings to drive future growth and value, such as in our Emerging Markets commercial infrastructure and an expansion of our research capabilities in biologics. At the same time, we have also improved Core pre-R&D and operating margins over the period.

When completed, the next phase of restructuring, announced in February 2012, is expected to deliver a further $1.6 billion in annual benefits by the end of 2014. Total programme costs are estimated to be $2.1 billion (approximately $1.7 billion in cash costs), of which $261 million were charged in 2011, and the total number of positions expected to be impacted for this phase is estimated to be approximately 7,300. Final estimates for programme costs, benefits and headcount impact in all functions are subject to completion of the requisite consultation processes in accordance with relevant local requirements and labour laws.

Medium-term planning assumptions

When we announced our full year results for 2009, we set out a series of medium-term planning assumptions which we updated in January 2011 and February 2012. We continue to plan on the basis that revenue will be in the range of $28 billion to $34 billion per annum over the 2010-14 period. However, given increased government price intervention, currency movements and the divestment of Astra Tech, we now expect the centre of gravity for revenue for the remainder of the period is likely to be in the lower half of the range. Using our latest assessment, including the Complete Response Letter received in January 2012 for dapagliflozin in the US, we have lowered our risk adjusted view of the potential revenue contribution in 2014 from recently launched and pipeline products to between $2 billion and $4 billion.

Based on continued productivity improvements (including successful completion of restructuring initiatives), our planning assumption remains that Core operating margin, before investment in R&D (Core pre-R&D operating margin) will be in the range of 48% to 54% of revenue. We expect that these levels of revenue and margins would generate the requisite operating cash flow over the planning period to support the reinvestment needs of the business, debt service obligations and shareholder distributions. Over the planning period, we expect that between 40% and 50% of our pre-R&D post-tax cash flows will be reinvested in internal and external R&D and capital investments to drive future value and growth.

The planning assumptions described above depend in turn on assumptions and expectations regarding the development of our business, the industry and macro-economic factors. See the Financial Review for a discussion of our high-level planning assumptions. These and other assumptions underlying our expected future results are subject to risks and uncertainties and actual results may differ significantly from our current expectations. See the Principal risks and uncertainties section.

Non-core businesses

We have actively considered potential shareholder value creation from our non-core businesses and, in November 2010, formally initiated a review of strategic options for Astra Tech, a global leader in dental and healthcare (urological and surgical) products, services and support. Our review concluded with the sale of the Astra Tech business to DENTSPLY International Inc. for approximately $1.8 billion in cash in a transaction that closed on 31 August 2011. Proceeds from the sale are being returned to shareholders through share repurchases.

As of 31 January 2012, we had signed binding agreements with four of the five hospital-based outpatient cancer centres managed by Aptium Oncology, Inc. (Aptium Oncology). Under the terms of these agreements, each hospital has acquired Aptium Oncology’s interest in the assets used in connection with the operation of the cancer centres. Transactions with three of the five hospitals had closed by 31 December 2011, a fourth closed in January 2012. We expect the final transaction to be signed during the first quarter and close during the second quarter of 2012. IT transitional services support will be provided to each cancer centre during 2012.

 

Delivering our Strategy

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