FORM 6-K

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Report of Foreign Issuer

Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934

For February 2004

Commission File Number: 001-11960

AstraZeneca PLC

15 Stanhope Gate, London W1K 1LN, England

     Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

Form 20-F   X     Form 40-F      

     Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): ______

     Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): ______

     Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

         Yes           No   X  

     If “Yes” is marked, indicate below the file number assigned to the Registrant in connection with Rule 12g3-2(b): 82-_____________

 






The following information has been given to The Stock Exchange, London and is furnished pursuant to General Instruction B to the General Instructions to Form 6-K:

AstraZeneca PLC Annual Report and Form 20-F Information 2003




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  Annual Report and
Form 20-F Information
2003
   
  AstraZeneca Annual Report and Form 20-F Information 2003
   
   
   
   
   
 

 

 


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AstraZeneca Annual Report and
Form 20-F Information 2003
Contents

Contents



















Cardiovascular


Gastrointestinal


Neuroscience


Oncology


Respiratory and Inflammation


Infection


Geographic Review


Research and Development


Development Pipeline


Commercialisation and
Portfolio Management


Supply and Manufacturing


Other Businesses, Main Facilities
and Intellectual Property


Industry Regulation


Corporate Responsibility


Financial Review


Directors’ Report


Audit Committee’s Report


Directors’ Remuneration Report


Financial Statements
 


Preparation of the Financial Statements  
and Directors’ Responsibilities


Basis of Consolidation and Presentation
of Financial Information


Independent Auditor’s Report to the
Members of AstraZeneca PLC




Group Statement of Total Recognised
Gains and Losses








Notes to the Financial Statements
 






























Short term borrowings and overdrafts










Reconciliation of movements
in shareholders’ funds





















































126


127


135


138


140


Cross Reference to Form 20-F inside
back cover


 

Trade marks
Trade marks of the AstraZeneca group of companies appear throughout this document in italics. AstraZeneca, the AstraZeneca logotype and the AstraZeneca symbol are all trade marks of the AstraZeneca group of companies.

Use of terms
In this Annual Report and Form 20-F Information 2003, unless the context otherwise requires, ‘AstraZeneca’, ‘the Group’, ‘the Company’, ‘we’, ‘us’ and ‘our’ refer to AstraZeneca PLC and its consolidated entities.

Statements of competitive position
Except as otherwise stated, market information in this Annual Report and Form 20-F Information 2003 regarding the position of our business or products relative to its or their competition is based upon published statistical data for the 12 months ended 30 September 2003, or the month of November 2003, obtained from IMS Health, a leading supplier of statistical data to the pharmaceutical industry. Except as otherwise stated, this market share and industry data from IMS Health has been derived by comparing

our sales revenue to competitors’ and total market sales revenues for that period.

Statements of growth rates
Except as otherwise stated, growth rates in this Annual Report and Form 20-F Information 2003 are given at constant exchange rates (CER).

AstraZeneca website
Information on our website, astrazeneca.com, does not form part of this document.

Cautionary statement regarding forward-looking statements
In order to utilise the ‘safe harbour’ provisions of the US Private Securities Litigation Reform Act 1995, we are providing the following cautionary statement: This Annual Report and Form 20-F Information 2003 contains certain forward-looking statements about AstraZeneca. Although we believe our expectations are based on reasonable assumptions, any forward-looking statements may be influenced by factors that could cause actual outcomes and results to be materially different from those predicted. We identify

the forward-looking statements by using the words ‘anticipates’, ‘believes’, ‘expects’, ‘intends’ and similar expressions in such statements. These forward-looking statements are subject to numerous risks and uncertainties. Important factors that could cause actual results to differ materially from those contained in forward-looking statements, certain of which are beyond our control, include, among other things: the loss or expiration of patents, marketing exclusivity or trade marks; exchange rate fluctuations; the risk that R&D will not yield new products that achieve commercial success; the impact of competition, price controls and price reductions; taxation risks; the risk of substantial product liability claims; the impact of any failure by third parties to supply materials or services; the risk of delay to new product launches; the difficulties of obtaining and maintaining governmental approvals for products; and the risk of environmental liabilities.

 

 

©AstraZeneca PLC 2004



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  AstraZeneca Annual Report and
Form 20-F Information 2003
Key Achievements
01

Key Achievements


   
>   At constant exchange rates, total sales for the year were unchanged whilst absorbing the loss of $2.6 billion in US sales of Losec/Prilosec, Zestril and Nolvadex following anticipated patent expiries.
   
>   Operating profit was down 11% due to planned investments in R&D and SG&A required to launch new products and complete the product portfolio transformation.
   
>   Dividend increased by 13.6% to 79.5 cents for the full year.
   
>   Sales for key growth and launch products increased by 45% to $8.2 billion and now represent 44% of total sales.
   
>   Nexium sales reached $3.3 billion, up 62%.
   
>   Seroquel sales reached $1.5 billion, up 27%. Approvals for use of Seroquel in the treatment of acute bipolar mania were received in the US and Europe.
   
>   Symbicort sales reached $549 million, up 61%. Symbicort also gained first approval in Europe for use in the treatment of chronic obstructive pulmonary disease.
   
>   Arimidex is moving rapidly towards replacing tamoxifen as the standard of care in breast cancer. Sales up 46% to $519 million.
   
>   Rapid uptake of Iressa since first launch in Japan in 2002 and in the US in 2003, with over 100,000 patients treated since launch. 2003 sales reached $228 million.
   
>   Crestor sales reached $129 million. We estimate that more than 1.5 million prescriptions had been written for, and over 750,000 patients had been treated with, Crestor by the end of January 2004.
   
>   Exanta received its first regulatory approval (in France) in December 2003. Regulatory submissions were made in the US and Europe for key chronic indications, including prevention of stroke associated with atrial fibrillation.
   
>   R&D investment totalled $3.5 billion. We now have 12 projects in phase 2 development and 28 projects in phase 3.
   
>   Continued enhancement of supply and manufacturing processes led to improved customer service levels and reduced manufacturing lead times which consequently reduced the requirement for stock build-up.

Continuing Operations before Exceptional Items

2003
2002
% growth
CER
 

 
Sales $m 18,849   17,841    

 
Operating profit $m 4,111   4,356   –11  

 
Earnings per share $ 1.78   1.84   –9  

 
Group earnings per share $
(statutory FRS 3)
1.78     1.64     +3   

 

Dividend for 2003

 
$
Pence
SEK
Payment date
 

 
First interim dividend
0.255
15.9
2.07
 
6 October 2003
 

 
Second interim dividend
0.540
29.4
3.91
 
6 April 2004
 

 
Total dividend
0.795
45.3
5.98
 
 

 

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02 AstraZeneca Annual Report and
Form 20-F Information 2003
Chairman's Statement

Chairman’s Statement


Five years ago, on the completion of the merger of the Astra and Zeneca businesses, the new Board had a clear vision. AstraZeneca was to be a creative, fast and effective, research-based pharmaceutical company. Its increased global marketing strength provided the platform to realise the full potential of its productive R&D and deliver sustainable value to all its stakeholders.

Back in 1999, there were some substantial hurdles to overcome before this vision could be turned into reality. The first of these was to rapidly complete the merger, build on the strengths of the two partners to create a single unified culture and realise the merger cost benefits without significantly disturbing our day-to-day operations. This was achieved in the first two years.

Our focus was then on another major challenge; the transformation of our product portfolio from its historic reliance on successful but maturing products, such as Losec/Prilosec and Zestril, into a range of newer high potential medicines. Many commentators predicted a steep decline in sales and profit during this period.

By the end of 2003, this transformation had largely been achieved. There have been some delays in new product launches but also some of the more mature brands have not declined as fast as expected.
AstraZeneca is now facing an exciting period of expansion with few patent expiries and growth driven by the recently introduced products and by further new product launches. Recent investments in developing countries also add to the potential for growth.

Taking a wider perspective, the pharmaceutical sector continued to experience pricing pressures in major markets during 2003 and the AstraZeneca Board reviewed the Company’s approach to product pricing and market access for our products. We support the World Trade Organisation (WTO) resolution of outstanding

issues relating to the Doha Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPs) and the public health benefits that will flow from this resolution.

In the context of this business environment and recognising the specific challenges faced by the Company, AstraZeneca’s financial performance in 2003 has been excellent and the Board has recommended a second interim dividend of $0.54; 29.4 pence; SEK 3.91 per Ordinary Share bringing the total dividend for the year to $0.795; 45.3 pence; SEK 5.98, an increase of 13.6% in dollar terms. The share repurchase programme continued in 2003 with 27.2 million shares re-purchased for cancellation at a total cost of $1,154 million. The Board is proposing a further share repurchase programme of $4 billion to be completed by the end of 2005, subject to shareholders renewing the Company’s authority to re-purchase its own shares at the Annual General Meeting in April.

The AstraZeneca share price performed well in 2003 in both absolute terms and when compared with an international group of leading pharmaceutical companies, reflecting the market’s positive view of the Company’s future growth prospects.

During a busy year, the Board analysed trends in the pharmaceutical environment and reviewed the Company’s overall strategy and performance. I am happy to report good progress in the productivity increase programmes that cover all parts of the Company. In line with this culture of continuous improvement, the performance of the Board, its committees and all individual members were reviewed in a constructive discussion that identified areas for further improvement.

During the year the Board has reviewed its already demanding compliance procedures to respond to new laws and regulations in the US, Sweden and the UK. This Annual Report and Form 20-F Information, our Annual Review and Corporate Responsibility Summary Report have all been prepared in accordance with the new requirements. We have also reviewed and strengthened the Company’s Code of Conduct. In the US we have undertaken significant compliance training with our sales and other relevant personnel pursuant to the Corporate Integrity Agreement with the Office of Inspector General of the Department of Health and Human Services.

We welcome Michele Hooper and Joe Jimenez, who joined the Board in July as Non-Executive Directors. Michele’s experience at Caremark International and Baxter Healthcare in the US and Joe’s background as President and CEO of Heinz Europe and earlier positions in the US bring additional strengths to the Board. Håkan Mogren stepped down as Executive Deputy Chairman in August 2003 and continues as Non-Executive Deputy Chairman. In his executive capacity, Håkan Mogren served both Astra AB and AstraZeneca PLC with distinction and I am delighted that the Board will continue to benefit from his wise counsel.

I am grateful to my colleagues on the Board for their support, to the Senior Executive Team and to all our employees worldwide for their impressive contributions to the Company’s success. On behalf of the Board, I would like to thank them most warmly.

In 2004, we aim to deliver strong sales growth from our portfolio of important medicines while, at the same time, progressing the next wave of novel products. We will continue our investment strategy in developing regions to complement our strong presence in the major established markets.

Through strong sales growth coupled with productivity improvements across all our activities, we expect to deliver top tier financial performance in the years ahead.

Percy Barnevik
Chairman

*Abbott Labs, AHP, Aventis, BMS, Eli Lilly, GSK, JNJ, Merck, Novartis, Pfizer, Pharmacia, Roche, Sanofi-Synthelabo, Schering and Schering-Plough
Source: Thomson Financial Datastream



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  AstraZeneca Annual Report and
Form 20-F Information 2003
Global Market Overview 03

 
 
Global Market Overview

 

World markets
In 2003, worldwide sales of pharmaceutical products totalled $430 billion, representing an 8% growth (at constant exchange rates), compared to 10% in 2002. This lower growth is largely due to the performance of the US market, which accounts for around half of the world’s pharmaceutical expenditure. Whilst the US had a market growth rate of around 10%, this represented a decrease from 2002 (14%). A lower number of new product launches, patent expiries for several high sales products, together with pricing pressure have contributed to this decrease.

In Japan, the world’s second largest pharmaceutical market with 12% of world revenues, sales grew 2% reflecting the increasingly tough pricing environment in that country.

In Europe (27% of world revenues, 8% growth), the variations in regulatory frameworks were reflected in the considerably varied growth rates within the region including France with growth of 5%, Germany 6%, Italy 5%, Spain 12%, Turkey 37% and UK 10%.

China, which delivered 20% pharmaceutical market growth in 2003, Korea, Mexico and India are increasing in importance for the future.

Pharmaceuticals as part of healthcare
Expenditure on healthcare typically represents between 6% and 14% of a country
’s gross domestic product (GDP), with developed nations towards the top end and developing nations spending less. Pharmaceuticals as a proportion of this expenditure is usually between 10% and 20% and therefore, is in most cases still less than 2% of GDP even in developed nations. Pharmaceuticals offer many advantages over other forms of treatment for illness and are progressively replacing in-patient care, particularly for cardiovascular and central nervous system conditions, and they are the principal treatment for illnesses such as diabetes, asthma, gastric ulcers, skin complaints and many infectious diseases.

Doctors are still the key decision makers in relation to which treatments should be prescribed for their patients. As the economic burden of funding therapies increases, payers, including governments, health insurers, managed care organisations and employers are increasing their influence over the choices doctors make and health economics are an increasingly important element in prescribing patterns.

Growth drivers and limiters
Increasing populations and the rising percentage of elderly people are strong growth drivers for the pharmaceutical industry. In addition there are still major areas of unmet medical need since many diseases, such as Alzheimer
’s Disease and many cancers have no effective therapies, or are under diagnosed or sub-optimally treated. Scientific advances and new forms of communication, such as the internet, are also growth drivers.

Limiting the industry’s growth is the increasing pressure to contain healthcare costs from governments and other payers, which affects the pricing and/or the willingness to pay for certain therapies. This has led to a rise in the requirement for “co-pay” arrangements where patients contribute towards the cost of their therapies. Cost pressure is also driven by governments worldwide facing the challenge of providing more funding for the healthcare of the elderly. A significant example of a response to this challenge is the enactment of the Medicare Prescription Drug, Improvement, and Modernization Act in the US in 2003. Also in the US, the high costs of pharmaceuticals for uninsured senior citizens have led to increased cross border movement of products from Canada where prices are lower. Differential pricing across the world has long been a feature of the pharmaceutical industry but is now particularly evident in the US, especially for the uninsured who have to pay the full cost for their medicines, and this increased awareness of different pricing structures is contributing to a growing resentment of the industry.

Across the industry there has been a reduction in the number of new chemical entities (NCEs) being developed, in part as a result of investment in new technologies taking longer than anticipated to deliver new medicines, although there is evidence of an increase in NCEs entering development in 2003. The increased cost of providing more demanding safety and efficacy studies required by regulators and the effect of patent expiries for a significant number of companies’ products have also been contributory factors to limited growth.

The industry also faces issues that may curtail its ability to generate attractive return on investment from the growing obligations of corporate social and environmental responsibility and the threat of weakening intellectual property rights.

Future pharmaceuticals market
There are early signs of increasing numbers of potential products coming into development and despite the cost containment pressures, dip in R&D productivity and imminent patent expiries of some major products, the pharmaceutical market overall is forecast to grow by around 7% per annum to 2007. The companies that do best in this difficult environment will be those that combine real innovation with optimum operating efficiency.



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04 AstraZeneca Annual Report and
Form 20-F Information 2003
Chief Executive’s Review  

 
 
Chief Executives Review

 

In 2003, AstraZeneca made excellent progress establishing itself as a world leading pharmaceutical company focused on the research, development, manufacture and marketing of valuable prescription medicines and creating the platform for top tier financial performance in the coming years. First launches of Crestor, the further development of marketed products such as Iressa, Nexium and Seroquel, and the first approval for the revolutionary anticoagulant, Exanta, herald the passage into an exciting new era for the Company.

Our sales and marketing teams around the world now have the opportunity to realise the full potential of our successful research and development and, through wise investment and a continuing drive for improved productivity, deliver enduring growth of shareholder value.

In addition to good progress with the new products, we have also expanded our global presence with investments in research, development, manufacturing and marketing in important emerging markets. As a result of these and other initiatives, AstraZeneca has become one of the fastest growing pharmaceutical companies in, among others, Japan, China and Mexico.

During 2003 the performance of the new and growth products in the Company’s revitalised portfolio ($8.2 billion) largely offset the decline in global sales of Losec/Prilosec, Zestril and Nolvadex ($3 billion). This transformation, achieved without a decline in top-line sales, from a company that faced the biggest threat from patent expiries in the industry’s history, into the one with perhaps the best growth portfolio, is something of which our employees are justifiably proud.

Nexium, for gastrointestinal disorders, has maintained strong momentum despite an increasingly competitive market place. In the US alone, Nexium achieved sales of

$2.5 billion in the year. Globally annual sales reached $3.3 billion, less than three years after its first introduction in the US, making it one of the most successful launches ever of a new medicine.

Seroquel continues to grow strongly in the anti-psychotic market where its attractive profile makes it the agent of choice for increasing numbers of physicians and patients. Sales in 2003 were $1.5 billion and now, with the approval of a major new indication, the treatment of mania associated with bipolar disease, Seroquel looks set to play a key part in our future growth.

AstraZeneca’s cancer portfolio also made strong progress during the year with excellent data supporting the use of Arimidex (2003 sales $519 million) in the adjuvant treatment of breast cancer, strong sales for Faslodex ($77 million) which was launched in 2002 in the US, and the successful US launch of Iressa (2003 global sales $228 million) for the treatment of late stage non-small cell lung cancer.

The year also saw significant developments in AstraZeneca’s cardiovascular business including the launch in the US and 20 other markets of the lipid-lowering drug Crestor (2003 sales $129 million). The treatment of lipid disorders is a major priority for healthcare systems around the world and the profile of Crestor, which allows physicians and patients to achieve guideline lipid levels quickly and easily, gives us an opportunity to build a major new franchise in one of the largest sectors of medicine. Following successful introduction into a number of other markets, launch in the very important US market has gone well and early sales progress is encouraging. An important new study (CHARM) supporting the use of Atacand (2003 sales $750 million) in heart failure and the continued growth of Seloken/Toprol-XL (2003 sales $1.3 billion) have also helped to reinforce a leading position in cardiovascular medicine.

After a lengthy development programme involving more than 30,000 patients, I am pleased to report that the oral anticoagulant Exanta met important milestones at the end of 2003. In December we gained our first approval in France for this breakthrough medicine in the prevention of blood clots following orthopaedic surgery. As scheduled, in December we also filed in the US, Canada and Europe our largest ever

regulatory submission, this time for long term uses of Exanta in conditions such as the prevention of stroke in patients with atrial fibrillation.

In summary, 2003 has been an exciting year of great achievement. I would like to acknowledge the tremendous support I have received from my executive team and to recognise the immense contribution made by our creative, hardworking and committed employees around the world. Their combined efforts have already achieved a great deal. There is now much to do to realise the potential for outstanding growth and financial performance from this strong base.

The external environment is changing and our industry has to change with it.
Demographics and technology continue to drive demand for healthcare and for our products with the result that governments and payers face increasing pressure to control costs. At the same time the disparity of healthcare between the developed and the least developed nations continues to grow and the industry finds itself at the centre of much of this debate. It is in this environment that AstraZeneca has to succeed if it is to create value for all its stakeholders. The hard work of the last five years has positioned us well. We recognise and understand the challenges the future holds and we look forward to meeting those challenges in 2004 and beyond.

Sir Tom McKillop
Chief Executive



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  AstraZeneca Annual Report and
Form 20-F Information 2003


Financial Highlights
05


   
   
Financial Highlights  


Key growth and launch products
Atacand, Arimidex, Casodex, Crestor, Faslodex,
Iressa, Nexium, Seroquel, Symbicort, Zomig

*Sales growth in the key product sales table sets out underlying
performance which shows growth at constant exchange rates to
reflect the volume and price changes of the individual products by
excluding the effects of exchange.



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06
AstraZeneca Annual Report and
Form 20-F Information 2003
Board of Directors
 

 
 
Board of Directors at 31 December 2003


Percy Barnevik
Non-Executive Chairman

Håkan Mogren
Non-Executive Deputy Chairman

Jane Henney
Non-Executive Director

Karl von der Heyden
Non-Executive Director

Sir Tom McKillop
Executive Director
Chief Executive

Sir Peter Bonfield
Senior Non-Executive Director

Marcus Wallenberg
Non-Executive Director

John Buchanan
Non-Executive Director

Erna Möller
Non-Executive Director

Jonathan Symonds
Executive Director
Chief Financial Officer

Dame Bridget Ogilvie
Non-Executive Director

Michele Hooper
Non-Executive Director

Joe Jimenez
Non-Executive Director


 


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  AstraZeneca Annual Report and
Form 20-F Information 2003
Board of Directors
07




       
       
       




 

 

 

 

Percy Barnevik (62)
Non-Executive Chairman

Chairman of the Nomination Committee
Appointed as a Director 6 April 1999. Honorary Chairman of Sandvik AB. Non-Executive Director of General Motors Corporation. Member of the Academies of Engineering Sciences in Sweden and Finland and Honorary Member of the Royal Academy of Engineering, UK. Member of Advisory Councils in Korea, India and the Investment Council advising the South African Government. Member of the Business Council of American CEOs.
Member of the Advisory Board, Centre for European Reform, UK.

Håkan Mogren (59)
Non-Executive Deputy Chairman
Member of the Nomination Committee

Appointed as a Director 6 April 1999. Formerly CEO and a Director of Astra AB (appointed 18 May 1988). Chairman of Affibody AB and the Sweden-America Foundation. Vice-Chairman of Gambro AB. Member of the Board of Directors of Investor AB, Rémy Cointreau S.A., Groupe Danone and Norsk Hydro ASA. Director of the Marianne and Marcus Wallenberg Foundation.

Jane Henney (56)
Non-Executive Director
Member of the Audit Committee, the Nomination Committee and the Science Committee
Appointed as a Director 24 September 2001. Senior Vice-President & Provost for Health Affairs, University of Cincinnati Medical Center. Commissioner of Food and Drugs 1998-2001 and Deputy Commissioner for Operations 1992-1994, US Food and Drug Administration. Deputy Director, US National Cancer Institute 1980-1995. Non-Executive Director of AmerisourceBergen Corporation. Member of the Board of Trustees of the Commonwealth Fund and the Scripps Research Institute. Member of the Medical & Scientific Advisory Board of MPM Capital.

Karl von der Heyden (67)
Non-Executive Director

Chairman of the Audit Committee
Appointed as a Director 1 October 1998. Executive Vice-President 1989-1992 and Co-Chairman and Chief Executive Officer 1993 of RJR Nabisco. President and Chief Executive Officer of Metallgesellschaft Corp. 1993-1994. Vice-Chairman of PepsiCo, Inc. 1996-2001. Non-Executive Director of Federated Department Stores Inc., ARAMARK Inc. and Exult, Inc.

 

Sir Tom McKillop (60)
Executive Director and Chief Executive
Appointed as a Director 1 January 1996. Non-Executive Director of Lloyds TSB Group plc. President of the European Federation of Pharmaceutical Industries and Associations. Pro-Chancellor of the University of Leicester. Chairman of the British Pharma Group and the North West Science Council.

Sir Peter Bonfield CBE, FREng (59)
Senior Non-Executive Director
Chairman of the Remuneration
Committee and Member of the
Nomination Committee

Appointed as a Director 1 January 1995. Fellow of the Royal Academy of Engineering. Non-Executive Director of Telefonaktiebolaget LM Ericsson, Mentor Graphics Corporation and Taiwan Semiconductor Manufacturing Company, Ltd. Vice-President of The British Quality Foundation. Member of Citigroup International Advisory Board.

Marcus Wallenberg (47)
Non-Executive Director
Member of the Audit Committee

Appointed as a Director 6 April 1999. Formerly a Director of Astra AB (appointed 18 May 1989). President and Chief Executive Officer of Investor AB. Non-Executive Vice-Chairman of Saab AB, Skandinaviska Enskilda Banken AB and Telefonaktiebolaget LM Ericsson. Non-Executive Director of Scania AB, Stora Enso Oyj and the Knut and Alice Wallenberg Foundation.

John Buchanan (60)
Non-Executive Director

Member of the Audit Committee and the Remuneration Committee
Appointed as a Director 25 April 2002. Executive Director and Group Chief Financial Officer of BP p.l.c. 1996-2002. Member of the UK Accounting Standards Board 1997-2001. Senior Independent Non-Executive Director of BHP Billiton Plc and Non-Executive Director of Vodafone Group Plc.

Erna Möller (63)
Non-Executive Director
Member of the Remuneration Committee
and the Science Committee

Appointed as a Director 6 April 1999. Formerly a Director of Astra AB (appointed 15 May 1995). Executive Director of the Knut and Alice Wallenberg Foundation. Professor of Clinical Immunology and Member of the Nobel Assembly and of the Nobel Committee, Karolinska Institutet. Member of the Royal Swedish Academy of Engineering Sciences and the Royal Swedish Academy of Science.

 

Jonathan Symonds (44)
Executive Director and Chief Financial
Officer

Appointed as a Director 1 October 1997. Also has overall responsibility for Information Services. Non-Executive Director of QinetiQ Group plc. Member of the UK Accounting Standards Board. Chairman of The Hundred Group of Finance Directors in the UK.

Dame Bridget Ogilvie (65)
Non-Executive Director

Member of the Audit Committee and the Science Committee
Appointed as a Director 1 January 1997. Also has responsibility for overseeing corporate responsibility. Non-Executive Director of the Manchester Technology Fund Limited. Chairman of the Medicines for Malaria Venture and the Association of Medical Research Charities. Trustee of Cancer Research UK. Chairman of the Trustees of the AstraZeneca Science Teaching Trust.

Michele Hooper (52)
Non-Executive Director

Appointed as a Director 1 July 2003. President and Chief Executive Officer of Stadtlander Drug Company 1998-1999. Corporate Vice-President and President, International Businesses of Caremark International Inc. 1992-1998. Non-Executive Director of PPG Industries, Inc., Target Corporation and Davita Inc.

Joe Jimenez (44)
Non-Executive Director

Member of the Nomination Committee
Appointed as a Director 1 July 2003. Executive Vice-President of H J Heinz Company and President and Chief Executive Officer of Heinz Europe since 2002. Corporate Vice-President then Senior Vice-President and President of Heinz North America 1998-2002. Non-Executive Director of Hain Celestial Group, Inc.

Other officers of the Company at 31 December 2003 included members of the Senior Executive Team, as set out on page 45, and:

Graeme Musker
Group Secretary and Solicitor
Appointed as Company Secretary
6 June 1993.

         

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08 AstraZeneca Annual Report and
Form 20-F Information 2003
Strategy




       
       
Strategy      




We aspire to be the best in all areas of our business within a culture based on innovation combined with the disciplined and responsible approach required to achieve industry leading productivity.   By discovering, developing, manufacturing and marketing differentiated medicines that make a real contribution to human health, AstraZeneca aims to create enduring value for shareholders and society, and deliver a sustained financial performance that will match the best in the industry.   >


>
Further strengthening our commercial skills to drive success in our key markets

Enhancing our presence in important new, emerging markets through organic growth and strategic regional investments
         
    Our strategy for sustainable growth is:   > Pursuing value creating investment in significant targeted licensing and acquisition opportunities
         
    > Expansion of the development pipeline through continuously improved in-house discovery processes complemented by external collaborations and partnerships      
> Continuing to improve productivity in pursuit of operational excellence in all our activities
             
    > Successful delivery to market of the next wave of differentiated products currently in late stage development   > Delivering our core values through a responsible approach to business
             
    > Realising the full potential of our therapies through investment in projects that will extend their use and bring benefits to new patient populations      
             

Key Products

  Cardiovascular     Gastrointestinal     Oncology
  Atacand1 (candesartan cilexetil) angiotensin II antagonist for hypertension     Losec/Prilosec (omeprazole) proton pump inhibitor for acid related diseases     Arimidex (anastrozole) aromatase inhibitor for breast cancer
               
  Crestor2 (rosuvastatin) HMG-CoA reductase inhibitor (“statin”) for dyslipidaemia     Losec MUPS omeprazole in tablet form     Casodex(bicalutamide)anti-androgen for prostate cancer
               
  Exanta (ximelagatran) oral direct thrombin inhibitor for prevention of thrombosis in association with major orthopaedic surgery     Nexium (esomeprazole) proton pump inhibitor for acid related diseases     Faslodex (fulvestrant) oestrogen receptor antagonist with no agonist effects for breast cancer
               
  Plendil (felodipine) calcium antagonist for hypertension and angina           Iressa (gefitinib) signal transduction inhibitor for non-small cell lung cancer
               
  Seloken/Toprol-XL (metoprolol) beta blocker for hypertension, angina, heart failure and other uses           Nolvadex (tamoxifen) anti-oestrogen for breast cancer
               
  Zestril3 (lisinopril) angiotensin converting enzyme inhibitor for hypertension, heart failure and diabetic nephropathy           Zoladex(goserelin) LHRH agonist for prostate and pre-menopausal breast cancer, certain benign gynaecological disorders and assisted reproduction
               
  Respiratory and Inflammation     Neuroscience     Infection
  Accolate (zafirlukast) oral leukotriene receptor antagonist for control of asthma

    Diprivan (propofol) intravenous general anaesthetic for induction/maintenance of anaesthesia and sedation of intensive care patients     Merrem/Meronem4 (meropenem) ultra broad spectrum injectable antibiotic for serious bacterial infection
               
  Oxis (formoterol) inhaled fast onset long-acting bronchodilator for relief of asthma symptoms     Naropin (ropivacaine) local anaesthetic for surgical anaesthesia and acute pain management      
               
  Pulmicort (budesonide) inhaled anti-inflammatory for asthma control     Seroquel (quetiapine) atypical anti-psychotic for schizophrenia and other psychotic disorders      
               
  Rhinocort (budesonide) topical nasal anti-inflammatory for control of rhinitis     Xylocaine (lidocaine) local anaesthetic for use in surgery and dentistry      
               
  Symbicort (budesonide/formoterol) inhaled combination of anti-inflammatory and fast onset long-acting bronchodilator in a single inhaler     Zomig (zolmitriptan) for the treatment of acute migraine with or without aura      
               

1 Licensed from Takeda Chemical Industries Ltd. 2 Licensed from Shionogi & Co., Ltd. 3 Licensed from Merck & Co., Inc. 4 Licensed from Sumitomo Pharmaceuticals Co., Ltd.


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  AstraZeneca Annual Report and
Form 20-F Information 2003
Operational Review
09




       
       
Operational Review       




       

The growing demand for new medicines is driven by increasing populations and improved life expectancy as modern medicine supports an ageing population. According to the latest information available from the World Health Organisation (www.WHO.int), the greatest burden of disease is in the non-communicable disease sector where diseases such as unipolar depression, schizophrenia, diabetes, ischaemic heart disease, cerebrovascular disease and asthma have all increased over the last five years. Communicable diseases are also increasing due primarily to HIV/AIDS and tuberculosis.

AstraZeneca focuses its skills, experience and resources on six therapy areas: Cardiovascular, Gastrointestinal, Neuroscience, Oncology, Respiratory and Inflammation, and Infection which represent the majority of the worldwide burden of disease. We have a powerful range of products that meet patient needs in our chosen areas of activity including some significant areas of hitherto unmet medical need. We are committed to delivering new, medically important and commercially successful products to the market every year.

This Operational Review (pages 9 to 30) provides detailed information about our research, development, manufacturing and marketing activities worldwide and our performance in 2003.

Contents
Page
 
Therapy areas:    
– Cardiovascular
10
 
– Gastrointestinal
12
 
– Neuroscience
14
 
– Oncology
16
 
– Respiratory and Inflammation
18
 
– Infection
20
 
Geographic Review
21
 
Research and Development
23
 
Commercialisation and PortfolioManagement
26
 
Supply and Manufacturing
27
 
Other Businesses, Main Facilities and Intellectual Property
28
 
Industry Regulation
29
 
Corporate Responsibility
30
 

 


 
AstraZeneca in brief
 
                 
  > We spend around > Collaborations with leading > We have over 60,000  
    $14 million each working   academic centres and   employees worldwide:  
    day on research and   biotechnology companies        
    development (total R&D   and the in-licensing of   35,000 in Europe  
    spend in 2003: $3.5 billion)   innovative products and        
        technologies complement   18,000 in the Americas  
  > We employ 11,600   our in-house capabilities and        
    people in research and   play a key role in   8,000 in Asia, Africa  
    development at 11 R&D   strengthening our portfolio     and Australasia  
    centres in seven countries:            
    Sweden, the UK, the US, > We have 31 manufacturing >  We sell in over 100 countries  
    Canada, France, India   sites in 20 countries        
    and Japan     > Along with our commitment  
      > Around 16,000 people   to competitiveness and  
  > Our strong R&D pipeline   worldwide work in supply   high performance, we will  
    includes a number of   and manufacturing, including   continue to be led by our  
    significant innovations   some 13,000 people in   core values to achieve  
        formulation and packaging,   sustainable success  
  > We have 12 projects in   and 1,750 in active        
    phase 2 and 28 projects   pharmaceutical ingredient        
    in phase 3 development,   supply        
    as shown on page 24            
                 

 


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10 AstraZeneca Annual Report and
Form 20-F Information 2003
Operational Review




       
       
Cardiovascular (CV)      




       

We are a world leader in CV medicines, backed by over 40 years experience. We aim to build on our strong position, focusing in the short to medium term on the growth segments of hypertension, dyslipidaemia, thrombosis and type 2 diabetes.

 

 

 

 

 

 
  Therapy area overview
       
  > CV world market value: $98 billion.  
       
  > CV diseases account for 17 million deaths globally each year, making it the greatest risk to life for most adults.  
       
  > CV is the single largest therapy area in the global healthcare market.  
       
  > The statin market has a world market value of $22 billion.  
       
 
 
  2003 in brief
       
  > Crestor available in 25 markets including the US by the end of January 2004.  
       
  > Over 750,000 patients treated with Crestor by the end of January 2004.  
       
  > Seloken/Toprol-XL sales grew by an underlying 38% and exceeded $1 billion.  
       
  > First approval for Exanta in France. US and EU filings submitted.  
       
  > Erosion of Zestril sales following patent expiries in 2002.  
       
Products
Crestor (rosuvastatin) is a member of the class of products known as statins. During 2003, Crestor gained regulatory approval in more than 40 countries, including 13 European markets, the US and Canada.

In multiple clinical studies, Crestor has been shown to be more effective in lowering low density lipoprotein (LDL-C) than other prescribed statins. Additionally, Crestor produces a significant increase in high density lipoprotein (HDL-C), an effect that is maintained across the 10-40mg dose range. By the end of January 2004, we estimate that more than 1.5 million prescriptions were written for Crestor and over 750,000 patients had taken Crestor. Along with the extensive clinical trial database this experience demonstrates that Crestor is well tolerated in clinical use, with a safety profile in line with other marketed statins.

Our extensive, long term global clinical research initiative known as the GALAXY programme, including studies which investigate cardiovascular risk reduction and patient outcomes with Crestor, is now well underway. More than 30,000 patients are involved, two studies have been completed and 14 studies are ongoing in important medical areas including heart failure, end stage renal disease, acute coronary syndrome and regression of atherosclerosis.

By the end of January 2004, Crestor was launched in 25 countries including the US, Canada, the UK and the Netherlands. Further launches are planned throughout 2004 including in Japan, Italy and France.

Atacand (candesartan cilexetil) is an angiotensin II antagonist for the first line treatment of hypertension. The Atacand family of products shows a strong market acceptance and competes in the fastest growing sector of the global hypertension market (angiotensin II antagonists – plain and combinations with diuretic). During 2003, the CHARM programme, a comprehensive clinical study programme in heart failure, was published, showing significant reduction in cardiovascular mortality and hospitalisation for heart failure in patients treated with Atacand. The beneficial effect was regardless of age, sex and background treatment (also additive to the effect seen with angiotensin converting enzyme (ACE) inhibition). Initial regulatory approvals for the new indication of heart failure are currently

anticipated during 2004. The results of the CHARM programme will further differentiate Atacand within its drug class. The clinical programme investigating the effect of Atacand on retinopathy in diabetic patients (DIRECT) continued during 2003.

Seloken ZOK/Toprol-XL (metoprolol), a once daily tablet for 24 hour control of blood pressure and for use in heart failure, is the world’s leading product by sales in the beta blocker (plain and combinations with diuretic) class.

Plendil (felodipine) is a calcium antagonist for the treatment of hypertension and angina.

Zestril (lisinopril dihydrate), an ACE inhibitor, is used for the treatment of a wide range of CV diseases, including hypertension.

Information regarding patent challenges for Seloken/Toprol-XL and Plendil is set out on page 104.

Pipeline
We aim to broaden our CV portfolio into the areas of thromboembolism, dyslipidaemia, type 2 diabetes/metabolic syndrome, atrial fibrillation and vascular disease prevention.

Exanta, the first new oral anti-coagulant in almost 60 years, is a novel oral direct thrombin inhibitor targeted to prevent and treat the formation of blood clots (thrombosis). Exanta has been subject to the largest clinical study development programme in anti-coagulation to date, involving around 30,000 patients, and providing extensive outcome data. Several clinical studies with Exanta in prevention of stroke in patients with atrial fibrillation (SPORTIF III and SPORTIF V) and treatment of venous thromboembolism (VTE) (THRIVE Treatment) were presented during 2003. Liver enzyme elevations have been seen in a small proportion of patients treated with Exanta in chronic studies and are typically transient (occurring within the first two to six months), not associated with specific symptoms and tend to return towards normal whether or not treatment is continued. All data from the extensive clinical study programme has been shared with regulatory authorities to support a full evaluation of the benefit-risk profile for Exanta. The practical benefits of Exanta include fixed oral administration, rapid onset of action, low potential for drug/food and drug/drug interactions and no need for routine blood coagulation monitoring. A



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  AstraZeneca Annual Report and
Form 20-F Information 2003
Operational Review
11




Sales growth is shown in both reported and underlying 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. Underlying performance shows sales growth at constant exchange rates (CER) to reflect the volume and price changes of the geographic and therapy areas and individual products by excluding the effects of exchange. A description of the calculation of this measure is set out in the Financial Review on page 31, together with the reasons for its use.

   
       




       
Key product performance                                          
          2003           2002   2001     2003 compared to 2002     2002 compared to 2001  
 




 




 
   
   
 
Sales
$m
Growth
underlying
$m
Growth
due to
exchange
effects
$m
Sales
$m
Growth
underlying
$m
Growth
due to
exchange
effects
$m
Sales
$m
Growth
underlying
%
Growth
reported
%
Growth
underlying
%
Growth
reported
%














   


   


 
Seloken 1,280   340   39   901   187   3   711     38   42     27   27  














   


   


 
Atacand 750   121   60   569   148   11   410     21   32     36   39  














   


   


 
Plendil 540   25   26   489   21   5   463     5   10     5   6  














   


   


 
Zestril 478   (446 ) 47   877   (195 ) 5   1,067     (50 ) (45 )   (18 ) (18 )














   


   


 
Tenormin 342   (53 ) 25   370   (28 ) (6 ) 404     (15 ) (8 )   (7 ) (8 )














   


   


 
Crestor 129   122   7             n/m   n/m        














   


   


 
Other 391   (17 ) 45   363   (79 ) 14   428     (4 ) 8     (18 ) (15 )














   


   


 
Total 3,910   92   249   3,569   54   32   3,483     3   10     1   2  














   


   


 

phase 2 study (ESTEEM) also indicates that Exanta provides additional benefits when added to standard therapy (including aspirin) in prevention of major CV events in patients following a heart attack.

Exanta received its first regulatory approval for the prevention of VTE in major elective orthopaedic (hip or knee replacement) surgery in December 2003 in France. First regulatory submissions for the chronic indications in the US, Canada and Europe were made in December 2003. The filing in the US also includes prevention of VTE in major elective orthopaedic (knee replacement) surgery.

Galida is a treatment for insulin resistance related glucose and lipid abnormalities associated with type 2 diabetes/metabolic syndrome. It is in phase 3 development for the treatment of diabetes.

Our further research in thrombosis includes AZD6140, an oral anti-platelet therapy which is in phase 2. Novel research in atrial fibrillation includes AZD7009, an atrial repolarisation delaying agent, which is in phase 2 and AZD0837 and AZD0303 (both for thrombosis) which are in phase 1 and in pre-clinical development respectively. AZD9684 (a carboxy peptidase-U inhibitor for thrombosis) is in phase 1. AZD7806 and AZD8294 (in the dyslipidaemia area) and AZD4619 and AZD6610, for the treatment of metabolic disorders (diabetes mellitus and dyslipidaemia), are all in pre-clinical development.

Performance 2003
Reported performance
Reported growth for CV was 10% with sales of $3,910 million, an increase of $341 million from $3,569 million, notwithstanding the anticipated erosion of Zestril sales

following patent expiry.

Underlying performance
Excluding exchange effects of $249 million, CV underlying sales growth was $92 million or 3%. Sales in the US exceeded $1.6 billion.

Global sales of Seloken/Toprol-XL exceeded $1 billion for the first time, on continued strong growth in the US (up 47%), where total prescriptions increased by 25%, and market share of total beta blocker prescriptions of Seloken/Toprol-XL reached 26.2% in December, up 2.6 percentage points compared to 2002. Despite destocking in the last quarter, wholesaler inventories remained higher than normal at the year end.

Atacand sales increased by 28% in the US, and by 18% in the markets outside the US, which account for nearly two-thirds of global Atacand sales. US sales growth exceeded growth in total prescriptions, indicating some increase in wholesaler inventories.

Crestor sales were $129 million, including $62 million in the US. The early launch markets for Crestor included the Netherlands, Canada and the UK. Based on recent market research data, Crestor share of total prescriptions in these markets has reached 8.2% (the Netherlands), 6.9% (Canada), and 2.9% (UK) respectively, with shares of the dynamic segment (new and switch therapies only) considerably higher. In the US, Crestor was launched in mid-September. In the week ending 16 January 2004, Crestor share of new prescriptions in the US statin market was 4.6%, a good start in a highly competitive market. Crestor dynamic share of new statin treatments (new and switch therapy only) in the US is 13.7%.

Lisinopril, the active ingredient in Zestril, lost patent protection in most major markets during 2002. The major part of anticipated sales erosion has taken place during 2003, with sales falling by 50% to $478 million from $877 million. In the US, generic lisinopril held an 80% share of sales by the end of 2003.

Plendil sales rose by 5%, to $540 million. Continuing the trend of the last two years, growth in the US, where sales were up 13% to $237 million, was offset by lower sales in the rest of the world.

Performance 2002
Reported performance
CV sales grew by 2% to $3.6 billion in 2002, an increase of $86 million compared to 2001.

Underlying performance
CV sales growth included $32 million of exchange effects. Underlying sales increased by 1%.

Atacand sales grew by 36% to $569 million with an increase in the US of 37% to $206 million.

Prescriptions grew strongly forSeloken/Toprol-XL in the US generating sales of $617 million, an increase of 43% and a market share of 25%. Worldwide sales grew by 27% from $711 million to $901 million.

Erosion of Zestril sales commenced during the second half following patent expiry in the US, the UK and Japan, falling by 18% from $1,067 million to $877 million.

Plendil sales rose by 5% to $489 million. As in 2001, growth in the US (up 6% to $209 million) was offset by falling sales in the rest of the world.



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12 AstraZeneca Annual Report and
Form 20-F Information 2003
Operational Review  




       
       

Gastrointestinal (GI)

     




We aim to maintain our number one position in GI treatments through continued market penetration for Nexium worldwide, coupled with high quality innovation and productivity in the research and development of new GI therapies.

 

 

 
Therapy area overview
     
  >   World market value: PPI:
$19.1 billion.
     
  >   40% of adults in the western world regularly experience heartburn and 10% have gastro-oesophageal reflux disease (GERD).
     
  >   Helicobacter pylori (H.pylori) is the major cause of peptic ulcer disease and is a risk factor for gastric cancer. Prevalence rate of H.pylori infection in the population is 40%.
     
  >   Irritable bowel syndrome (IBS) is an increasingly common complaint which is inadequately treated. Prevalence rate in the population is 20%.
     
  >   Inflammatory bowel disease (IBD) is another area of significant unmet medical need.
     
 
 
2003 in brief
     
  >   Nexium launch in the US is one of the most successful pharmaceutical launches ever.
     
  >   Global sales of Nexium exceeded $3 billion (62% underlying growth).
     
  >   US court judgement inLosec/Prilosec litigation challenges confirmed by the US Appeals Court.
     

Products
Nexium (esomeprazole) is the first proton pump inhibitor (PPI) to offer significant clinical improvements over Losec/Prilosec and its main competitors, lansoprazole and pantoprazole. Nexium has been evaluated in clinical studies involving over 68,000 patients in 57 countries. It offers more effective acid inhibition than all other PPIs and, in the treatment of reflux oesophagitis, provides healing and symptom relief in more patients and in a shorter period of time than Losec/Prilosec, lansoprazole or pantoprazole. It is an effective, long term therapy for patients with GERD, with or without oesophagitis. For the treatment of active duodenal ulcer disease, seven day Nexium triple therapy (in combination with two antibiotics for the eradication of H.pylori) heals most patients without the need for follow up anti-secretory monotherapy.

Nexium is used to treat a wide range of patients, including both newly diagnosed and also patients switched from other therapies such as omeprazole, other PPIs and H2-receptor antagonists.

Nexium continues to establish a new improved treatment standard. It was first launched in Sweden in August 2000 and it is now available in 100 markets, including the US, Canada and all European countries. It has been well received by patients and physicians alike and over 145 million patient treatments had been administered by the end of 2003.

Regulatory filings for Nexium for the treatment (symptom resolution) of side effects from non-steroidal anti-inflammatory drugs (NSAID) and a parenteral formulation were made in 2003. First regulatory approval and launch of parenteral Nexium were achieved in 2003. The parenteral form of Nexium was approved in Europe in late 2003 as a dosage form when oral administration is not applicable for the treatment of GERD and it was confirmed that the side effect NSAID indication is within the existing treatment usage.

Losec/Prilosec (omeprazole), the first PPI, set a new global standard in the short and long term treatment of acid-related diseases in the 1980s and 1990s. Patients have benefited from over 720 million treatments with Losec/Prilosec since launch. Losec MUPS, a tablet formulation, has been launched in 57 markets.

Patent protection for omeprazole, the active ingredient in Losec/Prilosec, has expired. In a small number of countries, including some major markets, patent term extensions or supplementary protection certificates have been granted for the active ingredient.

In October 2002, the US Court for the Southern District of New York ruled that three out of four generic manufacturers sued by AstraZeneca infringed certain patents, including formulation patents for omeprazole, the active ingredient in Losec/Prilosec. This decision was upheld by the US Appeals Court in late 2003. The first US generic omeprazole product was launched in December 2002. Three further generic versions were launched in the US during 2003. Further information about the status of omeprazole patents and patent litigation is set out on pages 102 and 103.

In July 2003, the European Commission served a Statement of Objections on the Company, referring to alleged infringements of European competition law relating to certain omeprazole intellectual property rights and associated litigation, details of which are set out on page 103.

Entocort (budesonide) is a locally acting corticosteroid for the treatment of IBD with better tolerability than other corticosteroids and greater efficacy than aminosalicylic acid medicines.

Pipeline
In addition to exploring new areas of clinical use for Nexium and further strengthening the scope of its use in current areas, we focus on developing novel approaches to treating GERD, H.pylori, peptic ulcer disease, IBD and other gastrointestinal diseases, such as functional dyspepsia and IBS.

AZD0865 is a compound in a new class, potassium-competitive acid blockers, that has potential to provide faster, more effective and reliable inhibition of gastric acid secretion than PPIs in the treatment of acid-related diseases, such as GERD. It is now in phase 2.

AZD3355 and AZD9343, which are in pre-clinical development, are reflux inhibitors offering a potential breakthrough in the treatment of GERD through a new, targeted approach (other than inhibition of acid secretion) by inhibition of transient relaxations of the lower oesophageal sphincter.



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  AstraZeneca Annual Report and
Form 20-F Information 2003
Operational Review 13




       

Sales growth is shown in both reported and underlying 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. Underlying performance shows sales growth at constant exchange rates (CER) to reflect the volume and price changes of the geographic and therapy areas and individual products by excluding the effects of exchange. A description of the calculation of this measure is set out in the Financial Review on page 31, together with the reasons for its use.



Key product performance                                          
  2003   2002   2001     2003 compared to 2002   2002 compared to 2001  
 
 
 
   
   
 
          Growth           Growth                          
    due to     due to            
  Growth exchange   Growth exchange   Growth Growth   Growth Growth
Sales underlying effects Sales underlying effects Sales underlying reported   underlying reported
$m $m $m $m $m $m $m % %   % %














   


   


 
Nexium 3,302   1,225   99   1,978   1,395   15   568     62   67     n/m   n/m  














   


   


 
Losec/Prilosec 2,565   (2,259 ) 201   4,623   (985 ) 30   5,578     (49 ) (45 )   (18 ) (17 )














   


   


 
Other 76   8   5   63   17   2   44     13   21     38   43  














   


   


 
Total 5,943   (1,026 ) 305   6,664   427   47   6,190     (16 ) (11 )   7   8  














   


   


 
                                                 

AZD7371 is being evaluated in clinical studies for the treatment of functional GI disorders in phase 1.

Performance 2003
Reported performance
Reported sales in the GI therapy area fell by 11%, $721 million, to $5,943 million as increases in Nexium sales were offset by declines in Losec/Prilosec sales following patent expiries. Our world leading position in GI was nevertheless maintained.

Underlying performance
Exchange effects on sales in 2003 amounted to $305 million. As a consequence, the underlying sales decline at 16%, was higher than reported.

Global sales performance for Nexium was strong, particularly in the US where total prescriptions for Nexium overtook those for Losec/Prilosec during the year. Sales of Nexium in the US for the full year increased by 62% to $2,477 million. Total prescriptions for Nexium were up 46% and its share of total prescriptions in the US PPI market grew by nearly five percentage points over the course of the year, to 25.3%. It is the most prescribed PPI among gastro-enterologists in the US and overall the second most prescribed PPI in the US market. It is the leading product to which patients switch from other treatments in the anti-secretory category. This performance in the US was attributed to the strong clinical data available to support the sales force, Managed Care Access and a nationwide, direct-to-consumer advertising programme.

Sales of Nexium outside the US increased by 60% for the full year, with excellent growth in the major markets in Europe, particularly France, Germany and the UK, and a strong performance in Australia. On 14 January 2004 the Company announced that the European Mutual Recognition Procedure for the intravenous formulation of

Nexium had been successfully completed. An application for approval in the US is under review by the US Food and Drug Administration (FDA). The global PPI market continues to grow strongly (around 15% per annum). Nexium share of the PPI market across major markets was 24% in November 2003.

Losec/Prilosec sales were down by 49% for the year. The 70% decline in the US was broadly in line with the prescription trend. At the end of the year Losec/Prilosec brand share of total omeprazole prescriptions in the US was 27.4% as four more generic versions of omeprazole entered the market and Proctor & Gamble launched the first over-the-counter (OTC) version of the brand Losec/Prilosec OTC. Outside the US sales fell by 16%, although there was strong growth in Japan where sales increased by 39% from $92 million to $138 million.

Performance 2002
Reported performance
GI sales grew by 8% from $6,190 million in 2001 to $6,664 million in 2002.

Underlying performance
Excluding exchange effects, GI growth was 7%.

Nexium sales in the US totalled $1.5 billion and in December 2002 accounted for a 21% share of new prescriptions in the US PPI market. In the rest of the world, sales were $453 million – by the end of the year Nexium had been launched in 76 countries. Losec/Prilosec sales fell by 18% to $4.6 billion. The US decline of 21% was broadly in line with the prescription trend. Generic competition entered the US market in December 2002. Outside the US sales fell by 12%, despite strong growth in Japan (up 40% to $92 million) and Australia (up 25% to $95 million).



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14 AstraZeneca Annual Report and
Form 20-F Information 2003
Operational Review  




       
       
Neuroscience      




       

We aim to be a leader in neuroscience, by continuing to deliver a range of life changing medicines in the three key areas of psychiatry, analgesia and neurology and by maintaining our world leading position in anaesthesia.

 

 
 Therapy area overview
   
> Neuroscience world market value: over $85 billion.
 
 Psychiatry (market value: $37 billion)
> More than six million people suffer from schizophrenia and 17 million suffer from bipolar disorder in the major markets.
 
 Neurology (market value: $20 billion)
> Migraine is one of the 20 leading causes of disability in the world. Stroke is the third leading cause of death and one of the major causes of serious long term disability among adults in the US.
 
 Analgesia (market value: $25 billion)
> Over 46% of adults in the western world suffer from chronic pain. Pain management is the most common reason for seeking medical care.
 
 Anaesthesia (market value: $3 billion)
> Each year more than 26 million people in the US undergo medical treatment requiring anaesthesia.
   
 
 
 2003 in brief
   
> Seroquel sales grew by an underlying 27% to $1.5 billion.
   
> Seroquel widely approved in Europe and the US for the treatment of bipolar mania.
   
> Zomig Nasal Spray launched in the US and Europe.
   

 

Products
Seroquel (quetiapine) is an atypical anti-psychotic for the treatment of schizophrenia as an established first line, first choice treatment for a broad range of symptoms. It combines excellent efficacy with unique patient tolerability in terms of dose independent low level of extrapyramidal symptoms providing schizophrenia patients with benefits in mood symptoms.

This profile has led to the increased usage of Seroquel, substantially exceeding market growth across the globe. Seroquel is the only leading atypical to be gaining market share. In January 2004, the weekly new US prescriptions for Seroquel exceeded those written for olanzapine for the first time.

Seroquel is now widely approved in Europe and the US for the treatment of bipolar mania offering clinicians rapid control of their patients’ manic symptoms including psychosis, aggression/agitation with no emergent depression and a superior side effect profile.

Zomig (zolmitriptan) is indicated for the treatment of migraine with or without aura which offers migraine sufferers rapid, reliable relief of headache pain and other migraine symptoms and is well tolerated. Available in over 80 countries, it is the leading second-generation triptan with a unique range of formulations to provide rapid migraine relief.

Zomig Nasal Spray is a new formulation in a convenient device, which delivers fast pain relief. The nasal spray has been successfully launched in Europe and the US. Launch in Japan is expected in 2004.

Zomig Rapimelt is a rapidly dispersible formulation offering patients a convenient, orange flavoured melt-in-the-mouth tablet that now accounts for more than 30% of Zomig sales.

Diprivan (propofol), the world’s largest selling general anaesthetic, is used in the induction and maintenance of anaesthesia and for intensive care sedation. More than 90% of total Diprivan sales consist of Diprivan EDTA, a microbial resistant formulation, which is approved in the majority of markets.

Naropin (ropivacaine) is the best selling, long-acting local anaesthetic. With its improved safety and mobility profile, it is

 

replacing the previous standard treatment of bupivacaine in major markets.

Xylocaine (lidocaine) continues to be the world’s most widely used local anaesthetic after 50 years on the market.

Information regarding legal proceedings in relation to Seroquel is set out on page 104.

Pipeline
We are focused on unmet medical needs in three key areas.

Psychiatry
Further developments of Seroquel are planned to show the full spectrum of clinical benefit in those suffering from mood disorders. In addition, new formulations are being developed to expand the treatment options available for patients.

AR-A2 is a novel 5HT1B autoreceptor antagonist in phase 2 for the treatment of depression and anxiety and AZD5455 is a pre-clinical candidate drug with a novel mechanism of action for treating anxiety.

We have discontinued the development of AZD1134 as a result of its failure to meet the target profile.

The collaboration with Shanghai Jiaotong University on neurogenetics, established in 2001, continues to progress well.

Analgesia
In pain control, our research focus is nociceptive pain (caused by tissue damage) and neuropathic pain (caused by nerve damage). Our pipeline includes AZD4282 in phase 1 for the treatment of neuropathic pain.

We have discontinued the development of AZD3582 and AZD4717 as a result of their failure to meet our target profile and have returned all rights to these compounds to NicOx.

Neurology
Cerovive (previously known as NXY059) is a nitrone with free radical trapping properties under development for the treatment of acute ischaemic stroke, a disease with substantial unmet need for new effective therapies. Pre-clinical data show that Cerovive preserves function and brain tissue, otherwise irreversibly damaged, when administered after the onset of permanent ischaemia in a model of



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  AstraZeneca Annual Report and
Form 20-F Information 2003
Operational Review 15




Sales growth is shown in both reported and underlying 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. Underlying performance shows sales growth at constant exchange rates (CER) to reflect the volume and price changes of the geographic and therapy areas and individual products by excluding the effects of exchange. A description of the calculation of this measure is set out in the Financial Review on page 31, together with the reasons for its use.  


Key product performance                                          
  2003   2002   2001     2003 compared to 2002   2002 compared to 2001  
 
 
 
   
   
 
          Growth           Growth                          
    due to     due to            
  Growth exchange   Growth exchange   Growth Growth   Growth Growth
Sales underlying effects Sales underlying effects Sales underlying reported   underlying reported
$m $m $m $m $m $m $m % %   % %















 


   


 
Seroquel 1,487   304   38   1,145   457   3   685     27   30     67   67  

   
   
 
Local anaesthetics 466     34   432   –    (2 ) 434       8        

   
   
 
Diprivan 458   (7 ) 22   443   (12 ) (1 ) 456     (2 ) 3     (3 ) (3 )

   
   
 
Zomig 349   (3 ) 24   328   52   3   273     (1 ) 6     19   20  

   
   
 
Other 73   (5 ) 8   70   (80 ) 1   149     (7 ) 4     (54 ) (54 )

   
   
 
Total 2,833   289   126   2,418   417   4   1,997     12   17     21   21  

   
   
 
                                                 

acute stroke. We have commenced two major phase 3 trials known as the SAINT (Stroke – Acute Ischaemic – NXY Treatment) trials, which will compare the efficacy and safety of a 72 hour intravenous infusion of Cerovive given within six hours of the onset of symptoms versus placebo.

ZD0947, a novel non-muscarinic approach to overactive bladder, which is a common condition, is currently in phase 2.

AZD0328, AZD2858 and AZD3102 are new candidate drugs with novel mechanisms of action for the treatment of Alzheimer’s disease, a core strategic focus of our research. Alzheimer’s disease, the most common cause of dementia, affects more than 45 million people in the US.

Our collaboration with NPS
Pharmaceuticals continues to progress well with early and late phase pre-clinical projects on metabotropic glutamate receptors covering all major neuroscience disease indications.

We have discontinued the development of AZD5106 as a result of its failure to meet the target profile.

Performance 2003
Reported performance
Reported growth for Neuroscience was 17%, with sales up $415 million from $2,418 million in 2002 to $2,833 million in 2003. The performance of Seroquel accounted for the majority of this increase.

Underlying performance
In the US, sales grew strongly by 14% to $1.7 billion. In the rest of the world sales also grew strongly by 10% to deliver global sales of $2.8 billion, a combined growth of 12% worldwide.

In the US, Seroquel sales reached $1,134 million for the full year, an increase of 22%. Total prescriptions for Seroquel in the US were up 34% for the year. The share of total prescriptions for Seroquel in the US anti-psychotic market reached a new high at 21.2% in December, up 3.4 percentage points compared to 2002. Seroquel was the only product among the three leading brands to increase its market share in 2003. Sales growth in the last quarter of the year was lower than the underlying prescription trend implying some reduction in wholesaler stocking.

Sales of Seroquel in markets outside the US increased 45% for the full year. Sales in Europe were up 40%, and sales in Japan rose 67%. Japan is now the second largest market for Seroquel where it is sold by Fujisawa and continued growth is anticipated through the development of new claims, new indications, new formulations and increasing penetration of a growing schizophrenia market.

Zomig sales for the full year fell by 1% to $349 million (global market share remains at 16%); growth was 7% outside the US, whilst sales were down 8% in the US. Rapimelt continued to grow strongly in southern Europe and Japan and now contributes more than half of brand sales in these markets. Zomig Nasal Spray launches continue and the introduction of this formulation in the US helped drive sales in the last quarter.

Sales of Diprivan worldwide, at $458 million, fell by 2%. The rate of decline since patent expiry has slowed.

Performance 2002
Reported performance
Neuroscience sales increased by 21% to $2,418 million in 2002, an overall increase of $421 million.

Underlying performance
Underlying sales growth was also 21%, with minimal exchange effects.

Seroquel sales grew strongly by 67% to $1.1 billion. US sales also grew by 67% to $927 million. Market share of new prescriptions in the US market was 19.2% by the end of the year, up 3.7 percentage points in the year making it the only major anti-psychotic with increasing share in this key market.

Zomig sales grew by 19% to $328 million (a global market share of 16%) with the bulk of the increase arising in Japan (up 67% to $14 million), France (up 29% to $60 million) and the US (up 20% to $177 million).

The sales increase for Diprivan in the US (up 3% to $216 million) was the result of growth in the underlying demand for propofol. However, global sales fell by 3% to $443 million.



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16 AstraZeneca Annual Report and
Form 20-F Information 2003
Operational Review  

 
Oncology

 

We aim to maintain our position as a world leader in cancer treatment through continued growth for Casodex, Arimidex and Zoladex, further launches of newer products, Faslodex and Iressa and the successful introduction of novel approaches currently in the pipeline.

 

 

 

 

 

Therapy area overview
   
>   World market value: cancer therapies: $18 billion.
   
>   Globally, over 12 million people are diagnosed with cancer each year.
   
>   Cancer is predicted to be the leading cause of death in the US by 2005.
   
   
2003 in brief
   
>  Rapid uptake of Iressa since first launch in Japan in 2002 and the US in 2003. Over 100,000 patients treated since launch.
   
>   Positive opinion on approvability of Faslodex from the CPMP in 2003.
   
>  Arimidex rapidly moving towards replacing tamoxifen as the standard of care in breast cancer.
   
>  Anticipated erosion of Nolvadex sales following expiration of US marketing exclusivity in early 2003.
   

Products
Casodex (bicalutamide) is the world’s leading anti-androgen therapy for the treatment of prostate cancer. Recent growth of Casodex has largely been driven by its use to treat early stage prostate cancer (EPC). Casodex 150mg has received regulatory approval for the treatment of EPC in over 50 markets to date. In the US, in 2002 the FDA did not approve this new indication. It is under review in several other markets. Elsewhere, the rapid uptake of Casodex in EPC as a favoured therapy is a demonstration of physicians’ growing confidence in the efficacy and tolerability profile of Casodex as a treatment in all stages of prostate cancer.

Zoladex (goserelin acetate) is one of the world’s best selling luteinising-hormone releasing hormone (LHRH) agonists for the treatment of prostate cancer, breast cancer and gynaecological disorders. It has been approved in 24 countries for the adjuvant treatment of early stage pre-menopausal breast cancer, as an alternative to and/or in addition to chemotherapy. Zoladex offers the proven disease free survival benefits of cytotoxics but with improved patient tolerability. In prostate cancer, Zoladex in the adjuvant setting is the only LHRH agonist shown to improve overall survival following radical prostatectomy or radiotherapy.

Iressa (gefitinib) is a novel anti-cancer agent that acts to block signals for cancer cell growth and survival. Clinical trials with Iressa as monotherapy for non-small cell lung cancer (NSCLC) showed response rates and disease control in approximately half of patients and symptomatic benefit in over 40% of patients treated. Regulatory filings based on monotherapy began in December 2001. Since first launch in Japan in 2002, uptake of Iressa has been rapid, reflecting the high unmet need in NSCLC and the significant benefit seen with Iressa. In the US, the FDA granted Iressa approval in May 2003, conditional upon conduct of further specified studies, and it is now approved in more than 15 countries. We are pursuing monotherapy submissions for Iressa in all other major markets, including Europe where filing was submitted in the first quarter of 2003 and definitive clinical studies are underway to secure unconditional approval in the US. To date, over 100,000 patients have been treated with Iressa. In Japan, reporting of interstitial lung disease associated with Iressa has

stabilised at 3%, a rate comparable to other therapies. By contrast, the reported rate is below 0.5% outside Japan.

Arimidex (anastrozole) is the world’s leading aromatase inhibitor. The ATAC study in breast cancer, first reported in December 2001 and then subsequently updated in December 2002, showed that Arimidex is significantly more effective in prolonging disease-free survival and has important tolerability benefits compared with tamoxifen. Based on the ATAC study, Arimidex is rapidly moving towards replacing tamoxifen as the standard of care in breast cancer. Regulatory approvals for Arimidex in the adjuvant treatment of early breast cancer in post-menopausal women have been granted in 57 markets including the US, Europe and Japan. Early breast cancer represents a major new market for Arimidex and is driving significant growth. Recent data from a major trial has shown significant improvements in efficacy and tolerability for women who switch therapy from tamoxifen to Arimidex before their standard five year course is complete. Arimidex is also approved for the treatment of advanced breast cancer in post-menopausal women based on demonstrated advantages over tamoxifen and megestrol acetate.

Faslodex (fulvestrant) is a new type of endocrine therapy, an oestrogen receptor antagonist, with no agonist effects, that down regulates the oestrogen receptor. It was launched in the US in May 2002 and subsequently in Brazil in July 2003, for the second line treatment of hormone receptor positive advanced breast cancer in post-menopausal women. Due to its novel mode of action, Faslodex offers an effective, well tolerated treatment option for patients, with the compliance and convenience benefits of a once monthly injection. In November 2003, the Committee for Proprietary Medicinal Products (CPMP) gave a positive opinion on the approvability of Faslodex in Europe. We currently expect to receive European approval in early 2004.

Nolvadex (tamoxifen citrate) remains the world’s most commonly prescribed breast cancer therapy and the first medication approved in the US for reducing the incidence of breast cancer in women at high risk of developing the disease. US marketing exclusivity for tamoxifen expired during 2003.



  AstraZeneca Annual Report and
Form 20-F Information 2003
Operational Review 17




Sales growth is shown in both reported and underlying 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. Underlying performance shows sales growth at constant exchange rates (CER) to reflect the volume and price changes of the geographic and therapy areas and individual products by excluding the effects of exchange. A description of the calculation of this measure is set out in the Financial Review on page 31, together with the reasons for its use.  


   
Key product performance                                          
  2003   2002   2001     2003 compared to 2002     2002 compared to 2001  
 
 
 
   
   
 
          Growth           Growth                          
        due to           due to                          
    Growth   exchange       Growth   exchange         Growth   Growth     Growth   Growth  
Sales   underlying   effects   Sales   underlying   effects   Sales     underlying   reported     underlying   reported  
$m   $m   $m   $m   $m   $m   $m     %   %     %   %  














   


   


 
Zoladex 869   6   69   794   80   (4 ) 718       9     12   11  














   


   


 
Casodex 854   140   70   644   81   2   561     22   33     15   15  














   


   


 
Arimidex 519   152   36   331   141   2   188     46   57     75   76  














   


   


 
Iressa 228   152   9   67   69   (2 )     227   240     n/m   n/m  














   


   


 
Nolvadex 178   (314 ) 12   480   (134 ) (4 ) 618     (66 ) (63 )    (21 ) (22 )














   


   


 
Faslodex 77   42     35   35         120   120     n/m   n/m  














   


   


 
Other 18   (1 ) 1   18   (8 )   26     (6 )     (31 ) (31 )














   


   


 
Total 2,743   177   197   2,369   264   (6 ) 2,111     8   16     12   12  














   


   


 
                                                 

Pipeline
We focus on the development of new agents and novel approaches across a wide range of cancers that include targeting tumour vasculature to control tumour growth, invasion and spread. The potential of Iressa to show benefits in a number of tumours in addition to expanding use of Iressa in NSCLC is being investigated with particular focus on head and neck, breast and colorectal cancers.

ZD6474 and AZD2171 are anti-angiogenics in phase 2 and phase 1 respectively which target the growth of blood vessels of tumours. AZD9935 is another anti-angiogenic in pre-clinical development.

ZD6126 is a vascular targeting agent in phase 2 which targets and destroys the vasculature of tumours, working to destroy the tumour from within. AZD4440, another vascular targeting agent, is in pre-clinical development. ZD4054 is an endothelin antagonist in phase 2 that works by targeting the endothelin A receptor, inhibiting tumour cell proliferation.

AZD0530 and AZD0424, anti-invasives in phase 1 and pre-clinical respectively, are designed to prevent tumours from spreading. AZD3409 is a prenylation inhibitor in phase 1 designed to inhibit the proliferation of cancer cells. AZD5438 is a novel selective cyclin dependent kinase inhibitor in phase 1 targeted at proliferating tumour cells. AZD1152, an aurora kinase inhibitor designed to target cell division in proliferating tumours, is now in pre-clinical development. AZD6244, also in pre-clinical development, is a selective MEK inhibitor targeting proliferating tumour cells.

Performance 2003
Reported performance
Oncology’s reported sales growth was 16% as revenues grew by $374 million from $2,369 million to $2,743 million.

Underlying performance
Oncology sales grew by 8% to $2,743 million with growth from Casodex, Arimidex and Iressa offsetting the decline in Nolvadex.

Casodex sales outside the US increased by 23%, driven by good growth in Europe (up 20%) and Japan (up 28%). Growth in Europe and Japan is driven by the expanding use of Casodex in early stage disease. In the US (where the market for anti-androgen therapy of advanced prostate cancer is maturing) the underlying demand is broadly unchanged with Casodex share of total prescriptions in this market being 83% in December. US sales growth of 18% is principally a reflection of wholesaler destocking in 2002.

Sales of Arimidex increased by 47% in the US and by 45% in the rest of the world, including a 61% increase in Japan.

Sales of Iressa reached $228 million during the year including sales in Japan of $101 million. Iressa sales in the US since launch in May 2003 totalled $102 million. In December, more than 7,300 retail prescriptions were dispensed in the US, bringing the total for the year to over 42,000.

Faslodex sales of $77 million reflect a steady increase in usage for the treatment of advanced breast cancer in the US market.

Underlying sales of Zoladex were maintained at $869 million. US sales of Nolvadex declined by $296 million to

$41 million following patent expiry in February 2003. Sales of Nolvadex elsewhere were $137 million.

Performance 2002
Reported performance
Sales grew by $258 million to $2,369 million in 2002, an increase of 12%.

Underlying performance
Minimal exchange effects meant that underlying sales growth was unchanged from reported performance at 12%.

Sales of Casodex outside the US increased by 42% to $464 million in 2002. Prescriptions for Casodex grew by some 5% in the US market. The reported sales decline in the US of 23% to $180 million reflected an adverse comparison against wholesaler stockbuilding which occurred at the end of 2001.

Arimidex enhanced its leading position in the aromatase inhibitor market. Monthly prescriptions in the US doubled since December 2001, driving the 127% increase in US sales for the year to $134 million. Sales outside the US increased by 51%.

Sales of Faslodex reached $35 million after eight months in the US, representing the most successful US launch of a hormonal agent for breast cancer in the last 20 years.

Sales of Iressa for the treatment of inoperable or recurrent NSCLC reached $67 million. Zoladex was the leading oncology product with $794 million sales and growth of 12%. US revenues for Nolvadex fell 27% to $337 million, as sales of our tamoxifen products fell as a result of the expiry of our distribution agreement with Barr Laboratories.



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18 AstraZeneca Annual Report and
Form 20-F Information 2003
Operational Review  




 
Respiratory and Inflammation (R&I)

 

We aim to build on our leading position in asthma treatment through the growth of key products, particularly Symbicort, new indications and market launches and the successful introduction of novel approaches to other areas of inflammatory disease such as chronic obstructive pulmonary disease (COPD) and rheumatoid arthritis.

 

 

 

 

 

 

 

 

 

Therapy area overview
   
>   R&I world market value: over $30 billion.
   
>   The World Health Organisation
estimates that 100 million people
worldwide suffer from asthma and
that COPD is the fourth greatest
cause of death globally.
   
2003 in brief
   
>   Clinical data confirm efficacy and
safety of
Symbicort as an adjustable maintenance treatment for asthma.
   
>  Filing submitted in Europe for
Symbicort
as a single inhaler
treatment of asthma.
   
> 
First approval for Symbicort for COPD
in Europe.

Products
Symbicort (budesonide/formoterol) is an innovative and effective asthma treatment that offers easily adjustable dosing. This will enable doctors to tailor a patient’s treatment of this variable disease with a single inhaler for all situations; for baseline therapy for increasing the dose during worsening attacks as well as for acute situations, thereby achieving greater efficacy than with fixed doses. It is a combination of the inhaled corticosteroid, budesonide, and the fast onset, long-acting bronchodilator, formoterol, in the Turbuhaler dry powder inhaler. Symbicort Turbuhaler is approved in 85 countries and launched in 62 countries. Encouraging clinical results confirm the efficacy and safety of Symbicort as an adjustable maintenance treatment for asthma providing superior asthma control compared to traditional fixed dose treatment. Phase 3 trials in asthma are progressing in the US. In 2003 Symbicort became the first fixed combination of inhaled corticosteroid and fast onset, long-acting bronchodilator approved for COPD in Europe.

In November 2003 a regulatory application in Europe was submitted for the new asthma treatment concept Symbicort Single inhaler Therapy (SiT), which is a further development of Symbicort adjustable maintenance dosing.

Pulmicort (budesonide) is a corticosteroid anti-inflammatory inhalation drug that helps prevent symptoms and improves the control of asthma. Pulmicort remains one of the world’s leading asthma medicines and is available in several forms, including the Turbuhaler dry powder inhaler, a pressurised metered dose inhaler and the Respules suspension for the treatment of children. The START study is a five year global trial and the largest of its kind involving more than 6,000 patients in 31 countries, with the objective of evaluating whether early intervention with inhaled glucocorticosteroids will affect the evolution of newly diagnosed asthma. The first three year clinical results of the study demonstrate the benefits of Pulmicort showing high efficacy and a good safety profile in the early treatment of asthma in adults and children preventing serious attacks.

Pulmicort Respules is the first and only nebulised corticosteroid in the US for children as young as 12 months. It has

grown strongly as a result of its beneficial profile and it has strengthened its position as the inhaled corticosteroid of choice for the treatment of children under five with asthma.

Oxis (formoterol) is a beta-agonist asthma therapy with a fast onset and long-acting clinical effect for the relief of asthma symptoms when corticosteroid treatment is not adequate. The RELIEF study, comparing Oxis to salbutamol/albuterol for exacerbation and asthma symptom control, was published in November 2003. Encompassing more than 18,000 patients, the study showed that Oxis is a more effective reliever therapy and at least as safe as salbutamol/albuterol.

Rhinocort (budesonide) is a nasal steroid treatment for allergic rhinitis (hay fever), perennial rhinitis and nasal polyps. It combines powerful efficacy with rapid onset of action and minimal side effects and is available as a once daily treatment in the Rhinocort Aqua pressurised metered dose inhaler and the Turbuhaler dry powder inhaler forms.

Accolate (zafirlukast) is an oral leukotriene receptor antagonist for the treatment of asthma available in most markets.

Pipeline
Symbicort phase 3 development is progressing in the US in the pressurised metered dose inhaler for asthma and COPD.

Development of Symbicort to further enhance its competitive differentiation in asthma is underway.

Four new compounds have entered pre-clinical development. They are targeted at asthma (AZD3778, AZD2098, AZD1981) and COPD (AZD6067). Compounds currently in clinical development include AZD8309 and AZD9056, each of which have novel mechanisms of action and are targeted at rheumatoid arthritis. AZD3342, AZD0902, AZD8309 and AZD9056 are all in pre-clinical development for COPD. AZD0902 for rheumatoid arthritis and AZD9056 and AZD8955, for osteoarthritis are also in pre-clinical development.

We have discontinued the development of AZD7140 and AZD0275 as a result of their failure to meet the target profile.



<

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  AstraZeneca Annual Report and
Form 20-F Information 2003
Operational Review 19




Sales growth is shown in both reported and underlying 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. Underlying performance shows sales growth at constant exchange rates (CER) to reflect the volume and price changes of the geographic and therapy areas and individual products by excluding the effects of exchange. A description of the calculation of this measure is set out in the Financial Review on page 31, together with the reasons for its use.  


   
Key product performance                                          
  2003   2002   2001     2003 compared to 2002     2002 compared to 2001  
 
 
 
   
   
 
          Growth           Growth                          
        due to           due to                          
    Growth   exchange       Growth   exchange         Growth   Growth     Growth   Growth  
Sales   underlying   effects   Sales   underlying   effects   Sales     underlying   reported     underlying   reported  
$m   $m   $m   $m   $m   $m   $m     %   %     %   %  














   


   


 
Pulmicort 968   101   55   812   36   10   766     12   19     5   6  














   


   


 
Symbicort 549   180   70   299   206   10   83     61   84     248   260  














   


   


 
Rhinocort 364   56   9   299   33   1   265     19   22     13   13  














   


   


 
Oxis 120   (14 ) 14   120   (11 ) 4   127     (12 )     (9 ) (6 )














   


   


 
Accolate 107   (40 ) 3   144   2   (1 ) 143     (28 ) (26 )   2   1  














   


   


 
Other 153   (8 ) 17   144   (14 ) 3   155     (6 ) 6     (9 ) (7 )














   


   


 
Total 2,261   275   168   1,818   252   27   1,539     15   24     16   18  














   


   


 
                                                 

Performance 2003
Reported performance
Reported growth for R&I was 24%. Sales increased from $1,818 million to $2,261 million, with Pulmicort and Symbicort driving the improvement.

Underlying performance
After excluding exchange effects of $168 million, R&I sales grew by 15% during 2003.

Symbicort sales for the full year increased 61% to $549 million, as the product continues to gain share in the rapidly growing market for fixed combination asthma treatments. Launches for the COPD indication as well as promotion of its specific adjustable maintenance dose regimen for asthma treatment, are fuelling this growth.

Pulmicort sales for the full year increased by 12% as a result of growth in the US market (up 41%). Pulmicort Respules accounts for most of this growth, with total prescriptions in the US market up 32% for the year.

Rhinocort sales in the US were up 27%, as growth in Rhinocort Aqua (58%) continues to more than offset the sales lost from the discontinuation of the Rhinocort Nasal Inhaler formulation.The sales growth in the US accounts for almost all of the global increase of 19% in Rhinocort sales.

Performance 2002
Reported performance
Reported sales grew by 18% from $1,539 million in 2001 to $1,818 million in 2002.

Underlying performance
After adjusting for the positive benefits of exchange of $27 million, sales increased by 16%.

Symbicort sales for the year were $299 million, an increase of nearly 250%.

Pulmicort Turbuhaler sales globally reflect the declining inhaled bronchial steroid market in the face of growing acceptance of combination products. However, this was more than offset by the 75% growth of Pulmicort Respules in the US, enabling Pulmicort to achieve a 5% global sales increase for the full year to $812 million.

Rhinocort sales in the US increased by 19% for the year to $211 million, fuelled chiefly by share gains for Rhinocort Aqua, which increased revenue by 39%. Sales were flat in the rest of the world resulting in a global 13% increase in the Rhinocort franchise sales to $299 million in 2002.



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20 AstraZeneca Annual Report and
Form 20-F Information 2003
Operational Review  




Infection Sales growth is shown in both reported and underlying 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. Underlying performance shows sales growth at constant exchange rates (CER) to reflect the volume and price changes of the geographic and therapy areas and individual products by excluding the effects of exchange. A description of the calculation of this measure is set out in the Financial Review on page 31, together with the reasons for its use.


   

We aim to build a franchise in the treatment of infectious diseases by increasing sales of Merrem and by exploiting our traditional, structural and genomic-based technologies.

 


Key product performance                                          
        2003           2002  
2001
   
2003 compared to 2002
 
2002 compared to 2001
 
 
 
 
   
   
 
  Sales
$m
  Growth
underlying
$m
  Growth
due to
exchange
effects
$m
  Sales
$m
  Growth
underlying
$m
  Growth
due to
exchange
effects
$m
  Sales
$m
    Growth
underlying
%
  Growth
reported
%
    Growth
underlying
%
  Growth
reported
%
 














   


   


 
Merrem 346   46  
15
  285   59   (1 ) 227     16   21     26   26  














   


 



 
Other 130   (36 )
11
  155   (17 ) 1   171     (24 ) (17 )   (9 ) (9 )














   


 



 
Total 476   10  
26
  440   42     398     2   8     11   11  














   


   


 
 

 

Therapy area overview
   
>   Infection world market value: $46 billion.
   
>   Infectious diseases cause more than 11 million deaths each year.
   
>   World demand for antibiotics remains high due to escalating resistance and the increased risk of serious infections.
   
2003 in brief
   
>   Steady underlying growth for Merrem in the US (7%) and globally (16%).
   
>  New laboratories opened in Bangalore, India, dedicated to finding a new treatment for tuberculosis.

Products
Merrem/Meronem (meropenem) is an intravenous carbapenem antibiotic for the treatment of serious hospital acquired infections. Clinical studies are in place to support a supplementary new drug application in the US in 2004 aimed at securing an indication for skin and skin structure infections in 2005.

Pipeline
Our R&D facility in Boston, US is progressing a range of projects using traditional, structural and genomic based technologies to deliver innovative antibacterial agents to the infection pipeline.

In June 2003, our new R&D facility opened in Bangalore, India. Work there is dedicated to finding a new treatment for tuberculosis, an infectious disease that is newly diagnosed in approximately two million people every year in India and over eight million people worldwide.

Performance 2003
Reported performance
Sales grew by 8% on a reported basis, rising by $36 million from $440 million to $476 million.

Underlying performance
Sales of Merrem grew steadily by a further 16% for the year to $346 million. Growth was largely attributable to sales outside the US, which were up 19% to $283 million. In the US sales grew by 7% to $63 million.

Performance 2002
Reported performance
Infection sales rose from $398 million in 2001 to $440 million in 2002, a reported increase of 11%.

Underlying performance
The underlying performance of 11% growth was driven by sales of Merrem which grew by 26% for the full year to $285 million, chiefly on the 31% increase in sales outside the US. In the US sales grew by 9% to $59 million. Other infection products declined by 9%.



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AstraZeneca Annual Report and
Form 20-F Information 2003
Operational Review
21




Geographic Review Sales growth is shown in both reported and underlying 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. Underlying performance shows sales growth at constant exchange rates (CER) to reflect the volume and price changes of the geographic and therapy areas and individual products by excluding the effects of exchange. A description of the calculation of this measure is set out in the Financial Review on page 31, together with the reasons for its use.

 
Geographic sales performance                                      
         
2003
         
2002
 
2001
 
2003 compared to 2002
 
2002 compared to 2001
 
 




 




 
   


   


 
 
Sales
$m
 
Growth
underlying
$m
 
Growth
due to
exchange
effects
$m
 
Sales
$m
 
Growth
underlying
$m
 
Growth
due to
exchange
effects
$m
Sales
$m
   
Growth
underlying
%
Growth
reported
%
   
Growth
underlying
%
 
Growth
reported
%
 

   
   
 
US 8,747   (608 ) 4   9,351   868     8,483     (6 ) (6 )   10   10  














   


   


 
Europe 6,709   75   939   5,695   244   213   5,238     2   18     5   9  














   


   


 
Japan 1,189   129   83   977   181   (55 ) 851     14   22     21   15  














   


   


 
ROW 2,204   294   92   1,818   215   (47 ) 1,650     16   21     13   10  

   
   
 
Total 18,849   (110 ) 1,118   17,841   1,508   111   16,222       6     9   10  

   
   
 
 

North America

US
Sales fell by 6% ($604 million) in 2003 from $9,351 million to $8,747 million following the loss of $2,646 million in sales to generic competition for Losec/Prilosec, Zestril and Nolvadex. The US remains the world’s largest market for pharmaceuticals and US consumers continue to drive demand and reward innovation especially for medicines that prolong, or improve the quality of, life. Our sales in the US of $8.7 billion reflect our commitment to driving growth in this key market. The US represents 46% of our total sales. AstraZeneca is currently the fifth largest pharmaceutical company in the US with our sales representing a 5% share of US prescription pharmaceutical sales. Underpinning our success in the highly competitive US market were the top-tier performances of Nexium, Seroquel and Toprol-XL, with combined sales of $4.5 billion. Nexium surpassed the $2 billion sales mark and now holds the position of the fastest growing PPI in terms of total prescriptions in a highly competitive market. Total US sales were $2,477 million for 2003 ($1,525 million for 2002) and total Group sales were $3,302 million for 2003 ($1,978 million for 2002). Toprol-XL became the most prescribed anti-hypertensive among cardiologists and Seroquel continued to gain share in the atypical anti-psychotic market. Other key growth products, including Arimidex, Pulmicort Respules and Rhinocort Aqua, outperformed the market in both sales and prescriptions. As expected, sales of Losec/Prilosec continued to decline as four more generic versions of omeprazole entered the market and Proctor & Gamble launched the first over-the-counter (OTC) version of the brand Losec/Prilosec OTC. Iressa was launched in May and has become an important medicine in the treatment of non-small cell lung cancer. Crestor was launched in September into the intensely competitive

lipid-lowering market and is now already the third largest statin in the US for patients who took statin therapy for the first time or who switched from another statin. We submitted our regulatory package for Exanta for chronic indications to the FDA in December 2003.

Our US sales force of 5,700 people is the sixth largest in the US. Investment in technology, strategic realignment and award winning training has significantly increased productivity and customer satisfaction.

During 2003 we entered into an arrangement whereby, from January 2004, a third party will manage the promotion, marketing and distribution of all Zomig formulations to provide greater field force coverage in this key market.

In 2003, we settled the investigation into the sales and marketing of Zoladex between 1993 and 1996 with the Department of Health & Human Services. This involved the payment of $355 million and, under the terms of the settlement, the Company pleaded guilty to one count of violating the Prescription Drug Marketing Act. In addition, our sales and marketing function and all other relevant employees received additional code of conduct and policy training as part of the Corporate Integrity Agreement with the Office of Inspector General of the US Department of Health & Human Services. Further information is set out on page 104.

Efficiency and effectiveness
In 2003, we undertook and completed a number of projects focused on efficiency and effectiveness.

We restructured our commercial organisation from a therapy area to a brandled structure, adding new business units dedicated to emerging brands and mature

products. We consolidated the number of advertising agencies we use, resulting in substantial cost-savings for the business.

We also established a new External Scientific Affairs function dedicated to enhancing relationships with key opinion leaders, academic and healthcare institutions and importantly, the FDA. Plans are also underway to locate an office close to the FDA to share scientific expertise on areas of common interest to the FDA.

Passage of a Medicare prescription drug benefit
In November 2003, the US Congress passed bipartisan legislation to add a prescription drug benefit to the Medicare programme. This new legislation is the first major change to Medicare in nearly 40 years. The drug benefit programme will take full effect in January 2006 although discount cards will be available in 2004 and 2005. We believe aspects of the law will have a positive incremental impact on patients and the industry in 2004. The final regulations for the law
’s implementation in 2006 and market forces will ultimately determine the full effect on our business.

We anticipate that the issue of cross border movement of products into the US and coverage for the uninsured will remain contentious among politicians, the media and special interest groups during 2004. We will continue to provide free and discounted medicines to qualifying patients through our Prescription Partnership Programmes. State Medicaid programmes will continue to be a challenge to the market in the US but innovative partnering opportunities with key states are in development to mitigate downward pressures on reimbursement.



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22  
AstraZeneca Annual Report and
Form 20-F Information 2003
 
Operational Review





         
Geographic Review continued





         

Canada
In 2003, underlying sales growth in Canada was 14% (reported growth of 25%) with total sales of US$712 million. We rank number three in Canada with a 7% market share. Canada was the first market to launch Crestor and it has already achieved 45% of new prescriptions in the private payer market. Iressa was also launched in late 2003. Symbicort and Nexium continued their strong performance as they both built market share. Atacand and Seroquel continued to enjoy double digit growth with underlying increases of 29% and 42% (reported growth of 44% and 55%) respectively. The oncology group grew 13% due to the continued success of Casodex and Arimidex. AstraZeneca ranks number one in Canada in oncology with a 21% market share.

Rest of the World
Europe
The market environment in Europe is increasingly challenging with governmental initiatives being taken to cut prices, particularly in Germany, Italy and the Netherlands. Generic substitution in Europe is being encouraged through legislation and in 2003, this has been particularly emphasised in France and the Netherlands. AstraZeneca is ranked fifth in the European pharmaceutical market with a market share of 5%. Sales reached $6.7 billion for the year resulting in an underlying 2% increase in Europe (18% reported growth). Strong sales performance in France (up 9% on an underlying basis and 28% on a reported basis to $1.5 billion) and Spain (up 12% on an underlying basis and 32% on a reported basis to $616 million) offset declining sales in the UK, the Netherlands and Sweden. Our increased focus in central and eastern Europe has resulted in a strong growth (19%) ahead of market growth for 2003.

Our sales growth in Europe was driven particularly by Nexium (+55% underlying, +80% reported), Symbicort (+53% underlying, +77% reported), Casodex (+20% underlying, +40% reported), Arimidex (+40% underlying, +63% reported) and Seroquel (+40% underlying, +60% reported) which offset the impact of patent expiries, specifically Losec/Prilosec, Plendil and Zestril in the UK, Sweden and the Netherlands. The underlying decrease in sales in Europe of these three products amounted to $390 million of which Losec/Prilosec alone accounted for $305 million. This decrease was offset by the

effects of exchange of $210 million and $149 million, respectively.

Crestor has exceeded expectations in most countries where it has been launched. In sales value, Crestor is, after seven months, the most successful product launch ever in the UK and the Netherlands. We have also seen strong uptake of market share for total prescriptions, particularly in the Netherlands, Ireland and Finland.

The transformation of our portfolio due to strong contribution of new products and the fast development of central and eastern European markets constitute a solid platform for future growth.

Japan
We continued to be the fastest growing major pharmaceutical company in Japan. AstraZeneca was ranked 14th by sales at the end of 2003. Sales reached $1,189 million, up from $977 million in 2002. A strongly performing product range in oncology including Arimidex, Casodex and Iressa, plus continued strong growth in Losec/Prilosec (up 39% on an underlying basis and 50% on a reported basis) drove an underlying 14% sales growth and a reported growth of 22%. After a weak first quarter, Iressa sales in Japan grew steadily in 2003. The growth is based on growing experience in Japanese patients and increasing confidence in second line treatment among oncology specialists. We have initiated a number of studies to further investigate the use of Iressa in Japan and will continue to work with the Ministry of Health, Labour and Welfare to ensure that Iressa is used appropriately in all patients who can be expected to benefit from the drug.

Asia Pacific (excluding Japan)
During 2003 we have achieved continued strong sales growth in the region despite the impact of the SARS outbreak earlier in the year. Sales reached $918 million with an underlying growth rate of 18%. Our continued investment in China, which resulted in above market performance (+37% on both underlying and reported basis), included increased manufacturing and commercial capability. Strong growth also continued in South Korea and India. Across the region the GI portfolio performed strongly. In Australia, Nexium sales grew strongly (+229% underlying, +279% reported) and its market share reached 25% in December. Crestor and Iressa were

successfully launched in a number of markets in Asia Pacific during 2003. This region represents an area of potential continued high growth for the future.

Latin America
The region has during 2003 continued to grow strongly with 17% underlying growth (6% on a reported basis) and sales reaching $515 million. Mexico with 24% underlying growth (12% reported) and Venezuela with 44% underlying growth (15% reported) provided strong sales growth with AstraZeneca being the fastest growing major pharmaceutical company in those countries. In Brazil, Chile, Uruguay and Peru, we grew significantly above market growth.

Crestor was successfully launched in, among others, Mexico, Argentina and Venezuela and it rapidly achieved a 24% volume market share in Mexico six months after its launch.



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  AstraZeneca Annual Report and
Form 20-F Information 2003
Operational Review 23

 
 
Research and Development (R&D)

 

R&D continues to focus on improving the productivity and efficiency of new drug discovery and development. We are simplifying our processes and continually review our plans and decision-making. We have streamlined portfolio reviews and target our strategic investment on areas directly linked to increased quality and output of new products.

In Discovery, we aim to increase the output of high quality candidate drugs (CDs) with a lower risk of failure in development. In Development, we aim to develop better drugs faster.

During 2003 we significantly increased the number of new Discovery projects, delivered a more consistent flow of good quality CDs, progressed a greater number of products to a robust clinical proof of principle stage and increased the number of drugs reaching human testing.

As described in the Development Pipeline table on pages 24 and 25, we now have 12 projects in phase 2 and 28 projects in phase 3 development.

AstraZeneca employs around 11,600 people in R&D. We have six major joint discovery and development facilities in the UK, the US and Sweden; a further four sites in the US, Canada, India and France which focus only on discovery, and a facility in Japan for development only. These resources are complemented by clinical development at 43 sites around the world. In 2003, our R&D investment totalled $3.5 billion.

R&D remains an integrated, project driven organisation. Our approach is therapy area led with scientific, medical, technical and ethical input and control being provided by large, multi-skilled Discovery and Development organisations. This offers a number of advantages including sharing of best practice in terms of science and technology and efficient use of resources across a multi-site, global organisation.

We remain focused on meeting our objectives of delivering new, medically important and commercially successful products to the market every year.

Discovery
Our Discovery organisation consists of highly skilled scientists working together across boundaries to gain critical mass

efficiencies and exchange of ideas and project opportunities.

Specialised groups in Safety Assessment and Process R&D work across all research areas, starting in Discovery and following projects through to Development and lifecycle management initiatives. Our strategic effort to significantly upgrade the links between clinical medicine and basic science (‘Discovery-Medicine’) is already proving to be valuable to the drug discovery process. Discovery-Medicine helps us gain a better understanding of human diseases and how future drugs will work to prevent and treat those diseases. We also continue to introduce more stringent safety and drug metabolism/pharmacokinetic testing earlier in the process, in order that CDs chosen for development are more likely to succeed.

During 2003, a further 15 CDs were selected (11 in 2002) and, in addition, 10 early development projects reached the stage of human testing (six in 2002).

Our global knowledge exchange system, which serves all Discovery sites maximises the benefits of the latest communication and informatics technologies. Our global Enabling Science and Technology group continues to support all research areas with skills in compound management, natural product screening, structural chemistry, bio-imaging, genetics, transgenics, protein science and informatics. New enabling technologies for drug searching have been introduced and a global compound collection enhancement project is ongoing.

We continue to invest in R&D facilities in line with our strategy. New or upgraded laboratory facilities were opened in 2003 in Sweden, the UK, the US and India. Recruitment of highly skilled new staff continues alongside the ongoing training and development of existing employees.

Development
Our Development organisation consists of people skilled in clinical research, regulatory affairs and pharmaceutical development. We believe that efficiencies are achieved from global working applied flexibly across the business. Our therapy area led product teams represent a matrix of all relevant functional skills and experience needed for robust, rapid drug development.

Our product focus in 2003 was to complete the development programmes and deliver the regulatory support required for the approval of Exanta and approval and launch of Crestor and Iressa. We also placed high priority on successful delivery of lifecycle management programmes designed to optimise growth of key marketed products including Nexium, Seroquel and Symbicort.

We continue to focus on improving our productivity and speed of product development. Significant e-based clinical and regulatory systems were introduced in 2003 that significantly increase the speed of access to data worldwide and reduce regulatory file preparation and submission timelines. These activities will be continued and extended.

Collaborations
To complement our in-house R&D capabilities, over 200 new collaborations have been entered into in 2003 with leading academic centres and biotechnology companies.

We entered into a collaboration with Abgenix Inc. with the aim of discovering fully humanised monoclonal antibodies for the treatment of cancer. This arrangement is complementary to our major activity in small molecules and will allow us to tackle a broader range of targets. Abgenix will provide antibody expertise and will take projects into clinical trials. We will provide the cancer expertise that will guide the choice of targets, the properties required out of the candidate drugs and clinical development.

Other examples of external collaborations include those with the University of Dundee and the University of Gratz as well as with, among others, Sumitomo Pharmaceuticals Co., Ltd., NeoGenesis Pharmaceuticals, Inc., Cytokinetics, Inc., Biosignal Inc. and Array Biopharma.



Back to Contents

24 AstraZeneca Annual Report and
Form 20-F Information 2003
Operational Review  

 
 
Development Pipeline

 

 

Compound Mechanism Areas under investigation Phase   Estimated filing date  
     


 
 
      PC 1 2 3   MAA   NDA  
Cardiovascular                      

NCEs                      

Exanta thrombin inhibitor prevention of VTE           Approved*   Filed  

Exanta SC formulation thrombin inhibitor (sc) prevention of VTE           Approved*   >2006  

Galida PPAR agonist diabetes /metabolic syndrome           2006   2006  

AZD6140 ADP receptor antagonist arterial thrombosis           >2006   >2006  

AZD7009 ARDA atrial fibrillation           >2006   >2006  

AZD9684 CPU inhibitor thrombosis           >2006   >2006  

AZD0837 thrombin inhibitor thrombosis           >2006   >2006  

AZD7806 IBAT inhibitor dyslipidaemia           >2006   >2006  

AZD6610   dyslipidaemia           >2006   >2006  

AZD4619   dyslipidaemia           >2006   >2006  

AZD0303   thrombosis           >2006   >2006  

AZD8294   dyslipidaemia           >2006   >2006  

Line Extensions                      











 
Atacand angiotensin II antagonist CHF outcomes (CHARM study)           2Q 2004   2Q 2004  

    diabetic retinopathy           2006   2006  

Crestor statin atheroma           2006   2006  

    outcomes CHF           >2006   >2006  

    outcomes renal           >2006   >2006  

Seloken/Toprol-XL beta blocker HCTZ combination               1H 2005  

Exanta thrombin inhibitor prevention of stroke in AF           Filed   Filed  

    treatment of VTE            Filed   >2006  

    arterial/post MI           >2006   >2006  

* France, Reference Member State for the EU Mutual Recognition Procedure.
                       
Gastrointestinal                      

NCEs                      

AZD0865 potassium-competitive acid blocker acid related GI disease           >2006   >2006  

AZD3355 inhibitor of TLESR GERD           >2006   >2006  

AZD7371   functional GI disorders           >2006   >2006  

AZD9343 inhibitor of TLESR GERD           >2006   >2006  

Line Extensions                      
Nexium proton pump inhibitor NSAID GI side effects – symptom resolution           Promotable*   Filed  

    parenteral formulation           Approved   Filed  

    NSAID GI side effects – healing and prevention           Filed   Filed  

    extra-oesophageal reflux disease           >2006   >2006  

*Authorities stated these symptoms were already captured within the GERD label. Text stating “No clinical interaction with naproxen or rofecoxib” was approved.
                       
Infection                      

Line Extensions                      

Merrem carbapenem antibiotic skin and soft tissue infections               2Q 2004  


                       
Neuroscience                      

NCEs                      

Cerovive free radical trapping agent stroke           2006   2006  
previously NXY059                      

ZD0947 K+ channel opener overactive bladder           >2006   >2006  

AR-A2 5HT1Bantagonist anxiety/depression           >2006   >2006  

AZD4282 NMDA antagonist neuropathic pain           >2006   >2006  

AZD4750 chemokine receptor inhibitor multiple sclerosis           >2006   >2006  

AZD5455   anxiety disorders           >2006   >2006  

AZD0328 alpha-7 nicotinic receptor agonist Alzheimer’s disease           >2006   >2006  

AZD2858   Alzheimer’s disease           >2006   >2006  

AZD3102   Alzheimer’s disease           >2006   >2006  

Line Extensions                      

Zomig 5-HT1B/1Dreceptor agonist nasal spray           Launched   Launched  

Seroquel D2/5HT2antagonist bipolar mania           Approved   Approved  

    sustained release           2H 2005   2H 2005  

    bipolar maintenance           2006   2006  

    bipolar depression           2006   2006  

    granules           >2006   >2006  


Back to Contents

  AstraZeneca Annual Report and
Form 20-F Information 2003


Operational Review
25


   
   
   


   
  Compound   Mechanism   Areas under investigation Phase   Estimated filing date  
           


 
 
            PC 1 2 3   MAA   NDA  
  Oncology                          

  NCEs                          

  Faslodex   oestrogen receptor antagonist   2nd line advanced breast cancer           Filed   Launched  

  Iressa   EGFR-TK inhibitor   NSCLC           Filed   Launched  

  ZD6474   angiogenesis inhibitor (VEGFR-TKI)   solid tumours           >2006   >2006  

  ZD4054   endothelin A receptor antagonist   solid tumours           >2006   >2006  

  ZD6126   vascular targeting agent   solid tumours           >2006   >2006  

  AZD2171   angiogenesis inhibitor (VEGFR-TKI)   solid tumours and haematological malignancies           >2006   >2006  

  AZD3409   farnesyl-transferase inhibitor   solid tumours           >2006   >2006  

  AZD0530   SRC kinase inhibitor   solid tumours           >2006   >2006  

  AZD5438   selective cyclin dependent kinase inhibitor   solid tumours           >2006   >2006  

  AZD4440   vascular targeting agent   solid tumours           >2006   >2006  

  AZD9935   angiogenesis inhibitor (VEGFR-TKI)   solid tumours           >2006   >2006  

  AZD0424   SRC kinase inhibitor   solid tumours           >2006   >2006  

  AZD1152   aurora kinase inhibitor   solid tumours           >2006   >2006  

  AZD6244   MEK inhibitor   solid tumours           >2006   >2006  

  Line Extensions                       

  Faslodex   oestrogen receptor antagonist   1st line advanced breast cancer           >2006   >2006  

  Iressa   EGFR-TK inhibitor   head and neck cancer           2006   2006  

          breast cancer           >2006   >2006  

          colorectal cancer           >2006   >2006  

Respiratory and Inflammation


  NCEs                          

  AZD9056   ion channel blocker   rheumatoid arthritis           >2006   >2006  

  AZD8309   chemokine receptor antagonist   rheumatoid arthritis           >2006   >2006  

  AZD8309   chemokine receptor antagonist   COPD           >2006   >2006  

  AZD9056   ion channel blocker   COPD           >2006   >2006  

  AZD3342   protease inhibitor   COPD           >2006   >2006  

  AZD0902   ion channel blocker   COPD           >2006   >2006  

  AZD0902   ion channel blocker   rheumatoid arthritis           >2006   >2006  

  AZD9056   ion channel blocker   osteoarthritis           >2006   >2006  

  AZD8955   collagenase inhibitor   osteoarthritis           >2006   >2006  

  AZD3778       asthma/rhinitis           >2006   >2006  

  AZD6067       COPD           >2006   >2006  

  AZD2098       asthma           >2006   >2006  

  AZD1981       asthma           >2006   >2006  

  Line Extensions                      

  Symbicort Turbuhaler   inhaled steroid/fast onset,
long-acting beta2 agonist
  single therapy for asthma           Filed      

  Symbicort pMDI   inhaled steroid/fast onset,
long-acting beta2 agonist
  asthma           2Q 2004   2005  

          COPD           2Q 2004   >2006  

         
Comments
As disclosure of compound information is balanced by the business need to maintain confidentiality, some compound information has not been disclosed at this time.

Compounds in development are displayed by phase.
       
         
Abbreviations:
5HT
5-hydroxytryptamine (serotonin)
5HT1B
1B subtype of 5HT receptor
5HT1D
1D subtype of 5HT receptor
5HT2
2 subtype of 5HT receptor
ADP
adenoside diphosphate
AF
atrial fibrillation
ARDA
atrial repolarisation delaying agent
CHF
congestive heart failure
COPD
chronic obstructive pulmonary disease
CPU
carboxy peptidase-U
D2
2 subtype of dopamine receptor
EGFR-TKI – epidermal growth factor receptor-tyrosine kinase inhibitor
GERD
– gastro-oesophageal reflux disease
GI
– gastrointestinal
HCTZ
– hydrochlorothiazide
IBAT
– ilial bile acid transport
K+
– potassium
MAA
– marketing authorisation application (Europe)
  MEK – mitogen activated (extra-cellular signal-regulated kinase) kinase
MI
– myocardial infarction
NCE
– new chemical entity
NDA
– new drug application (US)
NMDA
– N-methyl-D-aspartate
NSAID
– non-steroidal anti-inflammatory drug
NSCLC
– non-small cell lung cancer
PC
– pre-clinical: candidate drug accepted for development but not yet administered to man
pMDI
– pressurised metered dose inhaler
PPAR
– peroxisome proliferator-activated receptor
sc
– subcutaneous
TLESR
– transient lower oesophageal sphincter relaxations
VEGFR-TKI
– vascular endothelial cell growth factor receptor-tyrosine kinase inhibitor
VTE
– venous thromboembolism
>2006 – not earlier than 2007
  Discontinued projects:
AZD1134
anxiety/depression
AZD3582
acute/chronic nociceptive pain
AZD4717
acute/chronic nociceptive pain
AZD5106
overactive bladder
AZD0275
rheumatoid arthritis/COPD
AZD7140
rheumatoid arthritis/COPD
Oxis pMDI asthma

Back to Contents

26
AstraZeneca Annual Report and
Form 20-F Information 2003
Operational Review
 

 
 
Commercialisation and Portfolio Management

 

AstraZeneca continues to have one of the most competitive product portfolios in the pharmaceutical industry, supported by a robust new product development pipeline. Maintaining the quality of AstraZeneca’s portfolio requires careful prioritisation to manage both the progression of promising compounds from development to market place and to maximise the value of high potential marketed products.

We are committed to organic growth, but in common with other leading pharmaceutical companies, our licensing activities seek to bring in new products and/or technologies and to support growth products in a cost-effective manner.

The proven ability to bring major primary care products to market, replacing revenues lost due to patent expiry, is integral to the ongoing success of the Company. Product Strategy & Licensing (PS&L) provides commercial leadership, while working closely with R&D and our major marketing companies, to manage the commercial aspects of drug development and to co-ordinate our global product marketing strategy.

To ensure the success of our medicines, we must address unmet medical needs, find novel solutions, minimise technical risk and maximise commercial opportunity. PS&L is responsible for selecting the appropriate products for investment, developing effective marketing platforms to create market place awareness in time for new product launches and directing the creation and delivery of product marketing strategies that successfully align global and national plans.

Target product profiles (TPPs) for each new product are clearly defined at a very early stage in Discovery in order to both set parameters for R&D activity and to help shape the marketing strategy of the Company. Among the factors considered in developing a TPP are product features and benefits, medical and health outcomes information, positioning, demonstration of value and the competitive environment.

We have clearly defined lifecycle management programmes for all our products, which maximise not just the commercial potential of the brands, but also the value they bring to patients’ lives. In addition, our customer base has broadened over the past year and our marketing

programmes have widened accordingly to take account of every aspect of building global brands.

Our products have to bear scrutiny in relation to clinical efficacy and safety as well as value and ease of use for patients. Efficient pharmaceutical development requires transparent, quality assured processes which are acceptable to regulatory authorities plus the use of complementary new technologies and strategic outsourcing. We use internet-enabled processes and external partnerships to simplify the processes for our clinical trials, and internally, we exploit best use of document exchange sites and intranets to share knowledge and improve effectiveness and efficiency.

The internet also efficiently expands our channels of communication with patients and doctors. We use e-business opportunities to strengthen our relationships with key stakeholders and to improve our overall speed and effectiveness.

We are also utilising our knowledge and expertise to share medical and disease information and best practice with health professionals and, where allowed, with patients themselves.

To maximise the potential for empowering patients and patient groups, we have developed an e-learning programme which provides our marketing companies with a comprehensive range of resources with which to share disease and therapy information with healthcare practitioners, leading medical specialists and patients. In addition, a portfolio of online learning modules has been developed for employee use, deepening our own knowledge and awareness of key disease areas to better serve our customers.

We monitor market and industry trends to assess implications for our sector and for AstraZeneca in particular. Besides being driven by external environmental factors such as advances in science and technology, unmet medical needs and an ageing population, we need to meet future challenges such as pricing pressures and access to medicines. A sharp focus on threats and opportunities ensures we continue to deliver a commercially successful result from a pharmaceuticals business that maintains its competitive

position by developing new, innovative and cost-effective products from our R&D and in-licensing activities, which add value for healthcare professionals and our patients.

Our products are marketed primarily to physicians (both general and specialist) as well as to other healthcare professionals. Marketing efforts are also directed towards explaining the economic and therapeutic benefits of our products to governments and healthcare buying groups, for example, managed care organisations in the US, trust hospitals and budget-holding medical groups in the UK and other organisations which pay for healthcare costs in various countries. In the US, we invest a significant amount of money in direct-to-consumer advertising campaigns for certain of our products.

AstraZeneca’s principal competitors are other international, research-based pharmaceutical and biotechnology companies which also sell branded, patent protected, prescription pharmaceuticals.

Following patent expiry, our products also compete with generic pharmaceuticals. Competition with generic pharmaceuticals is principally on price since generic pharmaceutical companies typically incur only limited R&D costs compared to those of research-based companies such as AstraZeneca.

Our ability to maintain and enhance our competitive position in our chosen therapy areas depends mainly on our development of new, innovative, cost-effective products from our R&D and in-licensing activities, the manufacture and supply of products to high quality standards and the effective marketing of products to our global customer groups.



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  AstraZeneca Annual Report and
Form 20-F Information 2003
Operational Review 27




       
       
Supply and Manufacturing      




       

With 31 manufacturing sites in 20 countries and almost 16,000 employees worldwide, our Operations organisation provides secure, high quality, cost-effective supply of AstraZeneca’s product range globally. We measure our performance using four key metrics: customer service, supply capability, cost efficiency and licence to operate.

Customer service
The fast and effective introduction of new products is key to success. Our supply chains are designed to maximise flexibility. For example, in the US, Crestor was available to wholesalers within three days of FDA approval and the majority of retail stores were stocked within nine days. All other major products and line extensions were also successfully supported with supplies available to meet market demand. Process improvements, additional capacity investments and the effective use of external contractors ensure the secure and effective supply of established products. As part of our overall risk management, we carefully consider the timing of investment relating to the launch of new products. Secure supply chains are in place for all products in late stage development.

Supply capability
Our strategy remains to operate a small number of sites for the manufacture of active ingredients and combine it with effective use of outsourcing. AstraZeneca has active ingredient sites in the UK, Puerto Rico, Sweden and France and a bulk drug purification plant in Germany. Around 1,750 people are employed in active pharmaceutical ingredient supply.

AstraZeneca’s major products include Nexium, Crestor, Seroquel and Losec/Prilosec and these are manufactured in the US, the UK, Puerto Rico, Sweden and France.

Principal formulation sites for tablets and capsules operate in six countries – the UK, Sweden, Puerto Rico, France, Germany and the US. There are also major formulation sites for the global supply of parenteral and inhalation products in Sweden, France and the UK. Packaging is undertaken at a large number of locations, both at AstraZeneca sites and at contractors’ facilities, located close to our marketing companies to ensure rapid and responsive product supply. Around 13,000 people are employed in formulation and packaging.

Capital expenditure on supply and manufacturing facilities totalled $496 million in 2003. New plant included additional active ingredient capacity for Crestor in the UK, formulation capacity for Crestor in Puerto Rico and additional capacity for Pulmicort in the US. Plans are in place to expand capacity in the US, France, Sweden and Puerto Rico to meet the growing demands of our product portfolio including Symbicort, Pulmicort Respules and Crestor.

Raw materials
AstraZeneca’s global purchasing policies and processes together with our business interruption risk management (BIRM) process are aimed at ensuring the supply of raw materials, manufacturing equipment and other key supplies, all of which are purchased from a range of suppliers. The BIRM process systematically examines a range of risk scenarios to global supply, such as disasters that remove supply capability or the unavailability of key raw materials and ensures that these risks are mitigated by the implementation of contingency plans, including the appointment of dual or multiple suppliers and maintenance of appropriate stock levels. Although the price of raw materials may fluctuate from time to time, our global purchasing policies seek to avoid such fluctuations becoming material to our business.

Cost efficiency
2003 saw the continued implementation of the new AstraZeneca supply system which has demonstrated benefits in the first year of operation, with higher customer service levels, reduced manufacturing lead times and consequently reduced requirements for the build up of stock. The programme was implemented in the US, the UK and Sweden and will be extended to the rest of the supply network in 2004. Due primarily to exchange effects, underlying improvements in stock levels are not readily apparent from the published financial statements.

Cost efficiencies are also driven by continuous review of our manufacturing assets to make sure that they are being used most effectively, whilst preserving the flexibility we need to respond to fluctuations in demand. A number of older units were closed during the year and our facility in Sanda (Japan) was sold. A decision was also taken to close a sterile production facility in Canada. We will continue to make further adjustments to our manufacturing

base to ensure optimum utilisation of production facilities.

The new supply system has also increased the focus on managing costs throughout the product lifecycle. Product supply chains are being modelled with a view to targeting cost of goods reductions through improving yields, undertaking process changes and adjusting buying patterns to reduce material costs. Stock levels and stock turns are also being modelled for major products with a view to targeting stock reductions to improve working capital utilisation.

Licence to operate
We are committed to delivering a secure basis for assured product quality that ensures both the safety and efficacy of our medicines. As part of this, the outcomes of routine internal inspections as well as those by regulatory authorities are rigorously reviewed and, if required, actions taken to further enhance compliance. Device presentations of inhalation products present manufacturing challenges and where appropriate, like other manufacturers, we keep these under review with relevant regulators. The results of all external inspections carried out during 2003 were satisfactory and we did not experience any delays to approvals due to regulatory compliance issues at our sites or those of our contractors.

Safety, health and environment (SHE) operating standards are increasingly stringent with regulators placing particular emphasis on environmental issues and the safety of chemicals. AstraZeneca’s manufacturing sites operate under various licensing regimes and we are focused on meeting all regulatory requirements and current good practice standards. There are currently no environmental issues that constrain AstraZeneca from fully utilising any sites. We are making steady progress against our targets for the reduction of waste and energy usage and the level of accidents with injury is falling. Our aim for continuous improvement includes learning from incidences of non-compliance and sharing best practice to further promote high standards.

Further information and statistics about our SHE performance can be found in the separate 2003 Corporate Responsibility Summary Report or on our website: astrazeneca.com.



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28 AstraZeneca Annual Report and
Form 20-F Information 2003
Operational Review  




       
       
Other Businesses Main Facilities Intellectual Property




       

Astra Tech
Astra Tech is engaged in the R&D, manufacture and marketing of medical devices and implants for use in healthcare, primarily in urology and odontology, as well as in surgery and diagnostic radiology. Astra Tech has a leading position in several countries in Europe and is expanding its operations in key markets, particularly in the US.

All products showed good sales growth, in particular the Dental Implant System, which is gaining market share in several key markets. Further investments have been made in R&D, clinical research and new production facilities to strengthen the product portfolio and in the US in sales and marketing.

Salick Health Care
Salick Health Care (SHC) is a leading provider of outpatient oncology management and consulting services. Ownership of SHC provides AstraZeneca with a unique window on the provider sector of the US oncology market and access to many leading oncologists.

SHC manages full-service outpatient comprehensive cancer centres in affiliation with major teaching and community hospitals in California, Florida and New York and is affiliated with a large network of over 120 physicians, working in specialised areas such as medical, radiation and surgical oncology.

In 2003, SHC continued to perform well in its cancer centre management business with positive profit and cash contributions and is actively pursuing new growth opportunities. During the year, SHC announced a long term agreement for the provision of services to NYU Hospitals Center and signed an agreement with Boca Raton Community Hospital in Florida for management of a Lynn Regional Cancer Center facility.

SHC also continued the development of its innovative clinical research network to improve patient care and cancer treatment. The SHC Research Network is conducting a growing number of centrally co-ordinated phase 2 and 3 clinical trials.

AstraZeneca owns and operates numerous production, marketing and R&D facilities worldwide. Our corporate headquarters are in London, UK and our R&D headquarters are in Södertälje, Sweden.

Our principal R&D facilities are in the UK (Alderley Park and Charnwood); Sweden (Lund, MöIndal and Södertälje); the US (Boston, Massachusetts and Wilmington, Delaware); Canada (Montreal, Quebec); and India (Bangalore). Other R&D activity is carried out at Macclesfield and Avlon in the UK and Reims in France.

Out of a total 31 manufacturing sites in 20 countries, our principal manufacturing facilities are in the UK (Avlon and Macclesfield); Sweden (Snäckviken and Gartuna, Södertälje); the US (Newark, Delaware and Westborough, Massachusetts); Australia (North Ryde, New South Wales); France (Dunkirk, Monts and Reims); Germany (Plankstadt and Wedel); Italy (Caponago); Japan (Maihara) and Puerto Rico (Canovanas, Guayama and Carolina).

Bulk drug production is concentrated in the UK, Sweden, France and Puerto Rico.

Substantially all of our properties are held freehold, free of material encumbrances and we believe such properties are adequate for their purposes.

During 2003, AstraZeneca invested $3.5 billion in R&D activities. Obtaining adequate protection for the intellectual property associated with these activities continues to be a key business imperative. The range of protection includes patents, trade marks, design registrations, copyrights and internet domain name registrations.

Our policy is to seek patent and/or other appropriate intellectual property protection for all of the inventions and innovations of significant commercial value, which arise from our drug discovery, development, manufacturing, marketing and other business activities. It is also our policy to apply for intellectual property protection for all inventions and innovations being created as a result of the investments in R&D throughout the AstraZeneca organisation.

This policy is designed to provide each of our new products with an effective portfolio of valid, enforceable patent and other intellectual property rights in all significant markets to protect unauthorised competition during commercialisation. This shield of intellectual property rights extends to those areas of target identification, genomics and other research technologies in which we invest significant resources. The adequacy of the patent, design, trade mark and domain name portfolio for individual products is kept under review during product development, clinical evaluation and marketing so that, wherever possible, additional protection may be sought for new applications and other developments. The therapy area focus of our R&D operating model allows appropriate intellectual property strategies to be formulated and regularly updated from an early stage in product development.

We vigorously defend our intellectual property rights, including taking appropriate infringement action in various courts throughout the world.



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  AstraZeneca Annual Report and
Form 20-F Information 2003
Operational Review 29




       
       
Industry Regulation      




       

Our products are subject to numerous regulations concerning their safety and efficacy. In many cases, governments also fix their price and/or restrict access to reimbursement. The degree and scope of regulation varies according to the product and countries concerned. Regulations governing prescription pharmaceuticals are stringent and manufacture and marketing are normally conditional upon regulatory approval. Registration processes are complex and time-consuming and involve significant expenditure. Regulation is concerned not only with a product’s chemical composition, but also with matters such as manufacturing, handling, packaging, labelling, distribution, promotion and marketing.

AstraZeneca routinely participates in various industry associations and other bodies which, among other things, seek to ensure that those implementing legislation and regulations affecting pharmaceutical companies are fully informed as to its impact.

Product regulation
Before a pharmaceutical product is approved for marketing, it must undergo exhaustive and lengthy clinical trials. The process of developing a new pharmaceutical product, from discovery to launch in the market, can take up to 12 years, but this period varies considerably in different cases and countries. The time taken from submission of an application for marketing approval to launch of the product is typically one to two years.

After a product has been approved and launched, it is a condition of the product licence that all aspects relating to its safety, efficacy and quality must be kept under review. Depending on the country, fines and other penalties may be imposed for failure to adhere to the conditions of product licences. In extreme cases, the product licence may be revoked resulting in withdrawal of the product from sale. Promotional and marketing activities are also tightly controlled by regulations and self-regulating codes of ethical marketing practices.

During the marketing of a product, strict procedures must be in place to monitor, evaluate and report any potential adverse reactions. Where adverse reactions occur or it is judged that they may occur, changes may be required to prescribing advice and to the product licences. In extreme cases, the product licence may be revoked resulting in withdrawal of the product from sale.

Manufacturing plants and processes are subject to periodic external inspection by regulators as part of their monitoring procedures to ensure that manufacturers are complying with prescribed standards of operation.

Price regulation
Prescription medicines are subject to government controls on price and reimbursement which operate in most countries in which we sell our products. This can result in large price differentials between markets, which may be further aggravated by currency fluctuations.

US
Currently, there is no direct government control of prices for non-government drug sales in the US. Federal legislation mandates minimum discounts to US government agencies purchasing drugs for the active military, military veterans and other selected populations. Providing these substantial discounts to the US government is also a condition for the manufacturers’ drugs to be reimbursed by state Medicaid programmes and an additional rebate is required if manufacturer price increases after 1990 exceed the increase in inflation.

In addition, certain states have taken action to require additional manufacturer rebates on Medicaid drug utilisation for the indigent population.

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 was signed into law in December. The legislation adds a prescription drug benefit for Medicare beneficiaries in 2006 and makes discount cards available in 2004 and 2005.

Europe
Most governments in Europe control the price and reimbursement of medicines after taking into account the medical, financial and social impact of a product. This budget-based approach reflects increasing constraints in overall healthcare spending. Governments increasingly require more assurance of value in their expenditures on medicines.

In several European countries, the pricing and reimbursement systems are being reviewed, with the aim of controlling and limiting drug budgets. This is an ongoing process that puts a downward pressure on pricing and reimbursement of medicines in Europe.

Japan
There is formal central government control of prices in Japan. New product prices are determined primarily by comparison with existing product classes. All existing products are subject to a price review based on the market price at least every two years. In addition, products with generic competition are forced to further reduce prices by 4-6%. Regulations introduced in 2000 included an overseas price referencing system, under which prices can be adjusted according to the average price of four major countries (the US, the UK, Germany and France). Generally, if the US pricing environment remains unchanged, these regulations are likely to have a positive impact on pharmaceutical prices in Japan.

Product regulation: Astra Tech
Product registration and certified quality management systems form the basis of the regulatory environment relating to medical devices. In Europe, compliance with regulatory requirements involves the implementation and maintenance of a quality management system and, for certain products, a design dossier review. Medical devices in the US are regulated through a product registration requirement. Astra Tech continues to maintain a European and US compliant quality management system.

Product regulation: Salick Health Care (SHC)
The healthcare facilities to which SHC provides administrative and management services on behalf of certain hospitals are subject to extensive US federal, state and local legislation and regulations, such as those relating to the reimbursement and control of healthcare costs. The largest single component of SHC revenue continues to be fees that are affected by the reimbursement rates for healthcare services, which are set or regulated by federal or state authorities.



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30 AstraZeneca Annual Report and
Form 20-F Information 2003
Operational Review  




       
       
Corporate Responsibility (CR)    




       

The trust and confidence of all our stakeholders, together with our reputation, are among our most valuable assets. Along with our commitment to competitiveness and performance, we will continue to be led by our core values to achieve sustainable success.

Management
Good corporate responsibility depends on the right level of commitment from all employees, led by the AstraZeneca Board and Senior Executive Team, who approve the strategic direction, and our senior management, who are accountable for the development and implementation of appropriate programmes in their areas of responsibility. During 2003, we continued to integrate CR into business processes and consolidate the framework for local implementation of our global standards to ensure consistent and appropriate behaviour worldwide. Based on the global CR policy, local implementation programmes are required to take account of regional, site or functional priorities and objectives.

Monitoring progress
We have for some time had processes in place for monitoring our economic, environmental, safety and health performance. More recently, we have been focusing on developing key performance indicators (KPIs) in other areas of social responsibility. We are continually exploring the ways in which we can meaningfully benchmark our performance.

Auditing compliance
In 2003, we included a formal requirement to develop local CR implementation plans in our annual compliance report by senior management to the AstraZeneca Board (the ‘letter of assurance’). Alongside this, we are expanding our established safety, health and environment audit programme to include additional areas of CR. In 2003, 11 out of a total of 14 site audits included CR.

Corporate governance
During the year, we reviewed and refined our corporate governance controls to ensure that we are meeting new laws and regulatory requirements, including the ability to meet the appropriate executive certification requirements of the Sarbanes-Oxley legislation in the US and the changes introduced in 2003 by the revised Combined Code on Corporate Governance of the UK Financial Reporting Council.

AstraZeneca’s senior Non-Executive Director, Sir Peter Bonfield, was nominated

in 2002 as the contact for investors wishing to raise high level concerns about any potential corporate governance issues.

We also reviewed, re-published and widely circulated internally our Code of Conduct (see page 138) to make sure that our stated codes of practice continue to be appropriate. Compliance with the Code of Conduct is mandatory and is monitored through the annual ‘letter of assurance’ process and Group Internal Audit reviews.

The Code of Conduct includes procedures for employees to raise integrity concerns, including a confidential telephone helpline number.

Priority action planning
Stakeholder expectations are constantly evolving and we continuously monitor our internal and external environment for issues relating to our business that affect or concern society today. We use a formal risk assessment process to identify both the opportunities and the challenges that these issues present and to plan the actions needed to ensure our response is appropriate and consistent. During the year, we added sales and marketing practices to our CR Priority Action Plan to ensure they continue to receive the appropriate high level of attention and that we develop ways of improving our global reporting in this area. The settlement of the Zoladex investigation in the US (see page 104) strengthened our commitment to delivering high standards of ethical behaviour in the marketing of our medicines worldwide.

Access to medicines
Each of AstraZeneca’s development products is reviewed independently in relation to pricing and access in all markets, so that plans can be put in place early for those which may be regarded as essential medicines, either because they address diseases prevalent in developing countries or because they are potentially a leading or unique product in their class, offering significant patient benefit in a serious or life threatening condition. In these circumstances, we aim to make arrangements to ensure patient access to these medicines through charitable donations, expanded access programmes or differential pricing.

While we support the concept of differential pricing in this context, we continue to seek safeguards that differentially priced products are not diverted from the patients

who need them, to be sold and used in more affluent markets. Differential pricing can only be of benefit in countries where healthcare systems can deliver medicines to the patients that need them and ensure that they are used appropriately.

Research into neglected diseases of the developing world is essential to the effective treatment of these diseases in the future. AstraZeneca has recently made a substantial investment in new research facilities in Bangalore, India that are focused on finding a new treatment for tuberculosis, a major and increasing threat to life in developing countries. Should we be successful in identifying a potential new medicine, a key priority will be to develop it in partnership with governments, local organisations and international bodies, in order to achieve the earliest possible approval according to global standards. We hope that we can then again work in partnership with the relevant global and local organisations to ensure that any new treatment reaches the patients who need it.

In all cases of facilitating access to our medicines, we can only be successful if we can ensure that the product is not diverted away from those who need it and that we retain intellectual property rights, which enable us to protect our core business and provide for future investment in the discovery and development of new medicines for a wide range of diseases.

Our product donations and patient assistance programmes make products available free of charge or at reduced prices. In 2003, our commitment in this area totalled $724 million at average wholesale price.

Community support
We aim to make a positive contribution to our local communities through charitable donations and sponsorships that help to make a difference. In particular, we make contributions that are consistent with our business of improving health and quality of life and which promote the value of science among young people.

In 2003, our spend on community support totalled $22 million, including charitable donations of over $5 million.

More information is available in the separate 2003 Corporate Responsibility Summary Report and on our website: astrazeneca.com.



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    AstraZeneca Annual Report and
Form 20-F Information 2003
Financial Review
31

 
 
Financial Review

Introduction
The purpose of the Financial Review, together with the individual product performance in the relevant therapy area sections in the Operational Review on pages 9 to 30, is to provide understanding and analysis of our results for the year 2003 and of the progress made since 2002. It also provides details of material changes in financial performance between 2002 and 2001. The Financial Review describes:
   
> Non-GAAP measures; page 31
> Business background and major events influencing 2003; page 31
> Future prospects; page 32
> Sales by therapy area and operating profit 2001-2003 in tabular form; pages 32 and 41
> Results of operations summary analysis of year to 31 December 2003; page 32
> Financial position; page 33
> Liquidity and capital resources; page 34
  Financial policies; page 34
> Critical accounting policies and estimates; page 36
> Off balance sheet transactions, contingent liabilities and commitments; page 38
> New accounting standards; page 40
> International accounting; page 40.
 
Additionally, in accordance with US requirements:
   
> Results of operations summary analysis of year to 31 December 2002; page 40
> US GAAP information 2001-2003; page 42.
   
Non-GAAP measures
Growth rates in sales and operating profit, both in US dollar and percentage terms, are not referred to specifically in the Financial Statements but are discussed extensively elsewhere in this document. We measure, in part, our performance using financial growth rates and, accordingly, include them in our discussions here. External stakeholders, such as business analysts, also use these measures. In particular, to monitor performance internally, we use constant exchange rate or underlying growth, a non-GAAP measure which, unlike actual growth, cannot be derived directly from the information in the financial statements. This measure removes the effects of currency movements to focus on the changes in product sales and expenses
driven by volume, prices and cost levels relative to the prior period. We believe that these measures provide one of the most important insights into how our business is performing and our discussions in the underlying performance sections of this review use them. However, we recognise that these measures should not be used in isolation and, accordingly, we also discuss the comparable GAAP actual growth measures which reflect all the factors that affect our business in the reported performance sections of this document. Underlying growth is calculated by retranslating the current year performance at the previous years exchange rates and adjusting for other exchange effects, including hedging.
   
Business background and major events influencing 2003
The business background is described in the Operational Review sections of this report. The following comments highlight how these and other factors affect our financial performance.
   
Our operations are focused on prescription pharmaceuticals and more than 97% of our sales are made in that sector. Sales of pharmaceutical products tend to be relatively insensitive to general economic circumstances in the short term. They are more directly influenced by medical needs and are generally financed by health insurance schemes or national healthcare budgets.
   
Our operating results in both the short and long term can be affected by a number of factors other than normal competition:
   
> The risk of loss or expiration of patents and the potential adverse affect on sales volumes and prices from generic competition;
> The rate of sales growth and costs associated with new product launches, the timings of those launches and the risk that such new products do not succeed as anticipated;
> The adverse impact on pharmaceutical prices as a result of the regulatory environment. Although there is no direct governmental control on prices in the US, pressures from individual state programmes and health insurance bodies are leading to downward forces 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 which are imposed by governments; and
> Currency fluctuations, which can significantly affect our results. Our functional and reporting currency is US dollars as this is our single largest currency but we have substantial exposures to other currencies, in particular significant euro and Japanese yen denominated income and sterling and Swedish krona denominated costs.
   
Over the longer term, the success of our research and development is crucial. In common with other pharmaceutical companies we devote substantial resources to R&D, the benefit of which emerges over the long term and carries considerable uncertainty as to whether it will generate future products.
   
We discuss below the business events which were the most significant for our financial results.
   
In the last two years, our key challenge has been to effect a portfolio transformation whereby sales lost to patent expiries are replaced by new products and a new portfolio profile created. In 2003, the effect of this product portfolio transformation and prioritisation is clearly demonstrated by the fact that an underlying $3.0 billion ($2.8 billion on a reported basis) of sales lost to generic competition (Losec/Prilosec, Zestril and Nolvadex) have been compensated by the performance of our key growth and launch products. Sales from these growth and launch products amounted to $8.2 billion in 2003.
   
The US continues to be our largest market accounting for 46% of sales compared with 52% in 2002. This decline is due, in part, to Losec/Prilosec and Zestril facing generic competition for the whole of 2003, whilst the exclusivity Nolvadex enjoyed expired in February 2003. In the case of Losec/ Prilosec, supply constraints on generic producers during the first half of the year meant that their erosion of our market share, whilst significant, was restricted. However, combined with the effect of patients switching to Nexium, Losec/Prilosec sales declined by 70% compared with 2002. Zestril sales fell by 79% compared to 2002, a year which itself was lower than 2001 by 24%. Nolvadex sales fell by 88% to $41 million.
   
In Europe, underlying sales grew by 2% (reported growth of 18% including


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32 AstraZeneca Annual Report and
Form 20-F Information 2003
Financial Review

 
 
Financial Review continued

 

exchange effects of $939 million) and generated over 35% of our total sales, up from 32% in 2002. The weakening of the US dollar against the euro and other major European currencies contributed to this sales share increase. In Japan, underlying sales growth was 14% (reported growth of 22% including exchange effects of $83 million), accounting for over 6% of our sales whilst sales in the rest of the world grew by an underlying 16% (reported growth of 21% including exchange effects of $92 million). Further details are set out in the table on page 21.

Increased investment has continued in R&D and in selling and marketing activities. In both areas, prioritisation of resources across the portfolio is actively managed to avoid committing resources before opportunities are clear. R&D spend was particularly focused on completing the development programmes for Crestor, Iressa and Exanta. Selling and marketing resources were prioritised to recently launched and growth products such as Nexium, Crestor, Symbicort and Seroquel. Although we have increased investment, this has been accompanied by cost containment initiatives which have restricted underlying cost growth in these areas to just under 6%.

In 2003, we disposed of our Quornbusiness, Marlow Foods. Further details are set out on page 88. We continue to have operations through Astra Tech (medical equipment) and Salick Health Care (healthcare services) and through our non-core joint venture, Advanta. Salick and Astra Tech have seen strong underlying performances in 2003 with sales growing by 21% and 12% (reported growth of 21% and 33%), respectively.

In 2002, we took a $350 million exceptional charge in respect of the US Department of Justice investigation into the sales and marketing of Zoladex in the US as we were in the process of negotiating with federal and state authorities a potential settlement of the criminal and civil actions. These negotiations were concluded successfully in the first half of this year, and a settlement of $355 million was made, with the extra $5 million charged to operating profit before exceptional items in 2003. Further details are set out on page 104.

Future prospects
Continued good performance from newer products should deliver strong sales and profit growth over the next several years as the impact of generic erosion on the

business diminishes. We believe that our financial performance over this period is likely to rank amongst the best in the global peer group of large pharmaceutical companies.

Results of operations summary analysis of year to 31 December 2003
The tables on this page show our sales by therapy area and operating profit for 2003 compared to 2002.

Reported performance
Our sales increased by 6% compared to 2002, rising from $17,841 million to $18,849 million. Operating profit before exceptional items fell from $4,356 million to $4,111 million, a decrease of 6%.

2003 saw our portfolio transformation substantially completed. We absorbed the full year effects of generic competition for Losec/Prilosec, Zestril and Nolvadex and, following the launch of Crestor and the planned launch of Exanta, the elements to drive sales and earnings growth in 2004 and beyond will be in place.


                         
Sales by therapy area (2003 and 2002)                        
  2003
$m
      Growth
underlying

$m
      Growth
due to
exchange

effects
$m
      2002
$m
      Growth
underlying
%
      Growth
reported
%
 












 
Cardiovascular 3,910   92   249   3,569   3   10  












 
Gastrointestinal 5,943   (1,026 ) 305   6,664   (16 ) (11 )












 
Infection 476   10   26   440   2   8  












 
Neuroscience 2,833   289   126   2,418   12   17  












 
Oncology 2,743   177   197   2,369   8   16  












 
Respiratory and Inflammation 2,261   275   168   1,818   15   24  












 
Other pharma 152   75   12   65   115   134  












 
Others 531   (2 ) 35   498     7  












 
Total 18,849   (110 ) 1,118   17,841     6  












 

Operating profit (2003 and 2002)

  2003
$m
  Growth
underlying

$m
  Growth
due to
exchange
effects
$m
  2002
$m
  Growth
underlying
%
  Growth
reported
%
 












 
Sales 18,849   (110 ) 1,118   17,841     6  












 
Cost of sales (4,469 ) 211   (160 ) (4,520 ) (5 ) (1 )












 
Other operating costs (10,469 ) (537 ) (724 ) (9,208 ) 6   (14 )












 
Other operating income 200   (55 ) 12   243   (23 ) (18 )












 
Operating profit 4,111   (491 ) 246   4,356   (11 ) (6 )












 

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  AstraZeneca Annual Report and
Form 20-F Information 2003
Financial Review 33

 
 
 

 

Underlying performance
Sales
After the effects of changing product mix, and excluding the effects of exchange, our underlying sales remained virtually unchanged. Our sales performance was affected by the loss of $3.0 billion underlying sales in Losec/Prilosec, Zestril and Nolvadex which was compensated by strong performances elsewhere in the portfolio. In particular underlying sales for key growth and launch products increased by $2.4 billion (up 45%) to $8.2 billion.

Gastrointestinal is still our largest therapy area, accounting for over 31% of total sales (down from over 37% in 2002); continued strong growth from Nexium, where sales grew by 62% to $3.3 billion, restricted the declines seen in the Losec/Prilosec area.

In Cardiovascular, Crestor sales were $129 million for the full year and Seloken/Toprol-XL sales exceeded the $1 billion mark for the first time (up 38% to $1,280 million); these performances more than offset the 50% decline in Zestril sales resulting in an overall underlying performance up 3%.

Despite the generic erosion of Nolvadex in the US, Oncology sales increased by 8% with Arimidex (up 46% to $519 million), Iressa (up 227% to $228 million) and Casodex (up 22% to $854 million) all mitigating the fall in Nolvadex sales (down 66% to $178 million).

Neuroscience growth was 12% driven by a 27% increase in Seroquel sales whilst Respiratory and Inflammation performance improved by 15% with the most significant performance from Symbicort (up 61%).

Although wholesaler stocking patterns continue to have an impact on the quarterly phasing of sales, for the year as a whole we estimate that changes in excess wholesaler inventories had little or no effect on sales growth. At the year end, we estimate that excess wholesaler inventories were well under $100 million.

We discuss the performances of the therapy areas and the individual products in those areas in more detail in the appropriate sections of the Operational Review.

Geographic analysis
In the US, sales declined by 6% for the full year but, excluding the three products which faced generic erosion – Losec/Prilosec,

Zestril and Nolvadex increased 36%. Growth products with strong performances included Nexium (up 62%), Seloken/ Toprol-XL (up 47%) and Seroquel (up 22%). In addition, Iressa and Crestor were launched in the US in 2003.

Sales in Europe increased 2% for the full year, as strong sales growth for Nexium (up 55%), Symbicort (up 53%), Seroquel (up 40%), and the oncology products (up 18%) more than offset declines in Losec/Prilosec, Zestril and Pulmicort. Sales volumes increased by 5% but overall prices were lower by 3%. Performance in Europe was also affected by the significant increase in movements of products between countries, usually from southern Europe where prices tend to be lower than in northern Europe.

Sales in Japan were up 14% for the full year, as a result of increases in Losec/Prilosec (up 39%), Seroquel (up 67%), and a strong oncology portfolio (up 16%).

We discuss the geographic performances in more detail in the appropriate sections of the Geographic Review.

Operating margin and retained profit
Underlying operating profit declined by 11%. Operating margin fell from 24.4% to 21.8%. Currency had a neutral effect on operating margin. Although positive on gross margin, the effect was negative on SG&A and R&D costs. Gross margin increased 1.6 percentage points from 74.7% to 76.3% as a result of three factors – reduced payments to Merck following the lower proportion of sales of Merck linked products improved margin by 1.7 percentage points; underlying costs of sales declined by 0.7 percentage points, and the remainder was due to exchange benefits. These factors were marginally offset by a provision for disposal of a surplus manufacturing facility.

In aggregate R&D and SG&A grew by 5.8%, in underlying terms, with currency movements adding 8%. Against unchanged sales, both R&D and SG&A increased as a percentage of sales and exchange added 0.6 percentage points to these lines in combination. R&D increased 1.1 percentage points to 18.3% with spending including several up-front payments on collaboration agreements. SG&A grew by 2.8 percentage points to 36.4% as a result of the launches of Crestor and some field force increases in Europe and Japan.

Other income was $43 million lower principally due to the gain on disposal of Sular in the first quarter of 2002.

Net interest and dividend income was $91 million, benefiting in comparison with 2002 as several small exchange and market revaluation losses were absent in 2003.

The effective tax rate for the year was 27.2% compared to 26.8% in 2002. In the fourth quarter we concluded a negotiated settlement with the UK and the US governments covering all tax liabilities potentially arising from transfer pricing in respect of ex-Zeneca products for the years 1987 to 2001. This settlement had been provided for in previous years and had no impact on the 2003 tax charge. The increase in effective tax rate from 2002 reflects, amongst other things, a changing mix of countries where profit was earned.

Dividend and share re-purchases
We paid a first interim dividend for 2003 on 6 October 2003 of $0.255 per Ordinary Share. A second interim dividend for 2003 of $0.540 per Ordinary Share has been declared, which the Annual General Meeting will be asked to confirm as the final dividend. This, together with the first interim dividend, makes a total of $0.795 for the year. In 2003, we re-purchased 27.2 million Ordinary Shares for cancellation at a total cost of $1,154 million. It is our intention that dividends will increase broadly in line with earnings growth whilst bringing dividend cover to around the middle of the two to three times range.

Financial position
All data in this section is on an actual basis (unless noted otherwise).

The net book value of our assets increased from $11,226 million at 31 December 2002 to $13,257 million at 31 December 2003. The increase was driven primarily by retained profit after dividends of $1,686 million, and exchange benefits of $1,427 million less share re-purchases of $1,154 million.

Tangible fixed assets
Capital expenditure totalled $1,239 million, with major investments in Nexium manufacturing and R&D facilities.
Underlying expenditure was lower than 2002, particularly in the UK and the US. Depreciation of $986 million was significantly higher than 2002 due



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34 AstraZeneca Annual Report and
Form 20-F Information 2003
Financial Review  

 
 
Financial Review continued 

 

principally to exchange. The net book value of tangible fixed assets rose from $6,597 million to $7,536 million, including exchange effects of $827 million.

Goodwill and intangible fixed assets
Additions to goodwill and intangible assets amounted to $113 million, whilst amortisation totalled $304 million. After the effects of exchange, however, the carrying value of goodwill and intangible assets rose from $2,807 million to $2,884 million.

Stocks
Stock levels rose from $2,593 million at the end of 2002 to $3,022 million at the current year end. The vast majority of this increase can be attributed to exchange although stocks increased by $131 million in support of Crestor launches and other rapidly growing products offset by declines in stocks of mature products.

Debtors and creditors
Debtors increased from $4,845 million to $5,960 million. Exchange accounted for about $400 million of this increase. The underlying working capital balance increased due to higher invoiced sales in the US in December and a higher proportion of sales from Europe where average credit terms are longer than in the US. In addition, there were increased pension prepayments in the UK, the US and Sweden and higher tax balances.

Creditors have fallen from $7,733 million to $7,595 million. The decrease was due to the payment of $355 million (of which $350 million had been provided for at the end of 2002) in respect of the US Department of Justice Zoladex investigation, the final payment for the purchase of certain marketing rights of $129 million, lower amounts due to Merck and the settlement of several one-off items such as commitments to pension funds in the US and Sweden. There were offsetting increases from higher tax balances and exchange effects.

Net funds
At the end of 2003 our net funds stood at $3,496 million after settlement of the 6.3% guaranteed notes of $284 million. Net funds have declined by $348 million due almost entirely to lower operating cash inflows.

Liquidity and capital resources
All data in this section is on an actual basis (unless noted otherwise).

Cash flow
We continue to be a highly cash generative business. Although future operating cash flows may be affected by a number of factors as outlined in the business background section on page 31, we believe our cash resources will be sufficient for our present requirements and include sufficient cash for our existing capital programme, share re-purchases and any costs of launching new products.

Cash generated from operating activities before exceptional cash outflows was $4,617 million compared with $5,686 million in 2002. This decrease was primarily a result of a $1,101 million outflow on working capital – $540 million in debtors, $430 million in creditors and $131 million in stock. This was principally a consequence of factors set out in the discussions on stocks and debtors and creditors above. The stronger European and Japanese currencies also increased the cash flow effect compared to 2002. Cash expenditure on exceptional items was $391 million compared with $93 million in 2002, following the payment of $355 million in settlement of the Zoladex investigation. Tax paid was $886 million and includes the transfer pricing settlement.

Capital expenditure, including new fixed asset investments and intangible assets, totalled $1,597 million. Although this is similar to cash expenditure in 2002, it reflects slightly lower expenditure on tangible fixed assets, offset by exchange and higher fixed asset investments. The cash inflow in respect of the disposal of Marlow Foods contributed $80 million in the year.

After accounting for dividends paid of $1,222 million, net share re-purchases of $1,107 million and exchange of $82 million there is a $348 million decrease in net cash funds, which totalled $3,496 million at 31 December 2003.

Undrawn uncommitted bank facilities at 31 December 2003 totalled $485 million with maturities ranging from one to two years. Future operating cash flows may be affected by a number of factors as outlined on page 31.

Capitalisation
The share re-purchase programme begun in 1999 was extended in 2001 and is an integral part of the Company’s financial management. The original plan was to re-

purchase $4 billion of shares by the end of 2003 and this has now been completed. We have re-purchased 27.2 million shares in 2003 for $1,154 million, bringing the total number of shares re-purchased since the start of the programme to 92.8 million at a cumulative cost of $3,959 million. The number of shares in issue at year end was 1,693 million. The Board has approved a new programme of share re-purchases of $4 billion to be completed by the end of 2005, assuming continued market access and the absence of strategic uses for cash.

Our reserves were increased by $1,427 million due to the effect of exchange rate movements (after tax) on translation of non-dollar denominated assets and liabilities. Shareholders’ funds increased by a net $2,006 million to $13,178 million at year end. Minority interests increased from $54 million at 31 December 2002 to $79 million at 31 December 2003.

Investments, divestments and capital expenditure
There were no significant acquisitions in 2003. We disposed of Marlow Foods in the first half of the year resulting in net cash proceeds of $80 million.

Cash expenditure on fixed assets was $1,597 million and included a $100 million investment in preference shares in Abgenix Inc., as part of an oncology research collaboration agreement. The final $129 million instalment of an agreement signed in 1998 to re-purchase marketing rights was made. Capital expenditure was financed from internal resources.

Financial policies
Insurance
Our risk management processes are described in the Directors’ Report on page 45. An outcome of these processes is that they enable us to identify risks which can be partly or entirely mitigated through use of insurance or which we can self-insure. We negotiate best available premium rates with insurance providers on the basis of our extensive risk management procedures. In the current insurance market, 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 which we give particular attention to include product liability, business



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  AstraZeneca Annual Report and
Form 20-F Information 2003
Financial Review 35

 
 
 


interruption, directors’ and officers’ liability, and property damage.

Taxation
We operate in a number of countries worldwide and, as a consequence, are subject to many tax jurisdictions and rules. We manage our tax exposures through, amongst other things, efficient corporate structures and transfer pricing policies.

Treasury
Our financial policies covering the management of cash, borrowings and foreign exchange are deliberately conservative and intended to support our objective of building shareholder value by managing and controlling our financial risks. Our treasury operations are conducted in accordance with policies and procedures approved by the Board. The treasury activities are managed centrally from London and over 90% of our cash and short term investments is managed directly from London. With only limited and specifically

approved exceptions, all currency and interest rate hedging is conducted from London. Operating units benefit from local currency billing which has the effect of consolidating their foreign exchange exposures to central treasury.

Foreign exchange
The US dollar is our most significant currency. As a consequence, we have chosen to account for our results in US dollars and manage our exposures against US dollars accordingly. Approximately half of our sales in 2003 were denominated in currencies other than the US dollar, while a significant proportion of our manufacturing and R&D costs are denominated in sterling and Swedish krona. As a result, our operating profit in US dollars can be affected by movements in exchange rates. The significant weakening of the US dollar against sterling, the Swedish krona and the euro which was seen towards the end of 2002 has continued in 2003. This has had the effect of increasing the dollar value of our

European sales compared with the previous year whilst our UK and Swedish costs have also increased correspondingly. The overall effect of currency movements in 2003 has been to increase reported (compared to underlying) sales and operating profit by 6% and 5%, respectively. Our approach to managing currency exposures to mitigate these and other currency effects is described below.

Currency exposure is managed centrally using 12 month currency cash flow forecasts for our major currencies of Swedish kronor, sterling and euros and monthly updated foreign currency working capital forecasts reported by subsidiaries. We use derivative financial instruments, principally currency options and forward foreign exchange contracts, to hedge our currency exposure. It is our policy not to engage in any speculative transactions nor to hedge actively through the financial markets currency translation exposures arising from the consolidation of our non-US



Ratios             
As at end and for the year ended 31 December 2003   2002   2001  






 
Return on shareholders’ equity (%) 24.9   27.3   30.6  






 
Equity/assets ratio (%) 56.1   51.8   51.8  






 
Net funds/equity ratio (%) 26.4   34.4   29.9  






 
Number of employees 61,900   59,700   54,600  






 

Sensitivity analysis – 31 December 2003

  Market value change favourable/(unfavourable)  
 








 
  
Market value
31 December 2003
  
Interest rate
movement
  
Exchange rate
movement
 
 


 


 


 
 
$m
+1%
$m
–1%
$m
+10%
$m
–10%
$m












 
Cash and short term investments     4,039   (2 ) 2   (37 ) 37  












 
Long term debt     (371 ) 24   (30 )    












 
Interest and currency swaps     56          












 
Foreign exchange forwards     (7 )     71   (71 )












 
Foreign exchange options     148       (114 ) 162  












 
          22   (28 ) (80 ) 128  












 

Sensitivity analysis – 31 December 2002

                Market value change favourable/(unfavourable)  
 








 
 
Market value
31 December 2002
Interest rate
movement
Exchange rate
movement
  
 


 


 


 
 
$m
+1%
$m
–1%
$m
+10%
$m
–10%
$m












 
Cash and short term investments     4,793   (7 ) 7   (29 ) 29  












 
Long term debt     (733 ) 26   (32 ) 3   (3 )












 
Interest and currency swaps     82          












 
Foreign exchange forwards     (9 )     (3 ) 3  












 
Foreign exchange options     97       (10 ) 150  












 
          19   (25 ) (39 ) 179  












 

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36 AstraZeneca Annual Report and
Form 20-F Information 2003
Financial Review  

 
 
Financial Review continued


dollar subsidiaries. Key controls, applied to transactions in derivative financial instruments, are to use only instruments where good market liquidity exists, to revalue all financial instruments daily using current market rates and to sell options only to offset previously purchased options. The transaction exposures that arise from non-local currency intercompany sales and transactions with third parties of our subsidiaries are, where practicable, fully hedged using forward foreign exchange contracts and purchased currency options. Longer term forecast cash flow currency exposure is managed by forecasting cash flows by major currency for 12 months forward on a monthly rolling basis. Our policy in 2003 was to limit the potential downside by hedging 50%, subject to variation within authorised limits, using a mixture of purchased currency options and forward exchange contracts. In 2003, the US dollar depreciated against all major currencies. It is estimated that the effect of currency movements was to increase our continuing business sales by $1,118 million and to increase our operating profit by $246 million. At the end of 2003, contracts relating to 2004 cash flows had a value of $52 million (see Note 18 to the Financial Statements). In 2004, the policy has been modified to cover 95% of 12 month forward cash flows but only those currency movements outside specified limits. Within these limits, we are now effectively unhedged.

Interest rate risk
The management of our liquid assets and loans are co-ordinated and controlled centrally by our treasury operations. We have significant positive cash flows and the liquidity of major subsidiaries is co-ordinated in cash pools and concentrated daily in London. Interest rate risk is managed according to a benchmark reflecting 90 days duration of net liquid funds. Our liquid funds are primarily invested in US dollars. Our debt has an average maturity of 20 years and all borrowings with a maturity of more than one year are denominated in US dollars and have been swapped from fixed rate into floating rate debt.

Credit exposure
Our exposure to financial counterparty credit risk is controlled by our treasury team centrally by establishing and monitoring counterparty limits. Our centrally managed funds are invested almost entirely with

counterparties whose credit rating is ‘A’ or better. Trade debtor exposures are managed locally in the operating units where they arise. We are exposed to customers ranging from large private wholesalers to government backed agencies and the underlying local economic and sovereign risks vary throughout the world. Where appropriate, we endeavour to minimise risks by the use of trade finance instruments such as letters of credit and insurance.

Funding risk
We have significant net funds to finance the ongoing working capital and capital investment requirements of our operations. Group Treasury continue to monitor global debt markets and intend to put structures in place to access these should future market conditions be favourable or there is a need for additional funds.

Sensitivity analysis
The sensitivity analysis, set out in this review on page 35, summarises the sensitivity of the market value of our financial instruments to hypothetical changes in market rates and prices. Changes to the value of the financial instruments are normally offset by our underlying assets and liabilities. The range of variables chosen for the sensitivity analysis reflects our view of changes which are reasonably possible over a one year period. Market values are the present value of future cash flows based on market rates and prices at the valuation date. Market values for interest rate risk are calculated using third party systems which model the present value of the instruments based on the market conditions at the valuation date. For long term debt, a favourable change in market value results in a decline in the absolute value of debt. For other financial instruments, a favourable change in market value results in an increase in the absolute value.

The sensitivity analysis on page 35 assumes an instantaneous 100 basis point change in interest rates in all currencies from their levels at 31 December 2003, with all other variables held constant. Based on the composition of our long term debt portfolio as at 31 December 2003 (which is predominantly floating rate), a 1% increase in interest rates would result in an additional $3 million in interest being incurred per year. The exchange rate sensitivity analysis on page 35 assumes an instantaneous 10% change in foreign currency exchange rates from their levels at 31 December 2003, with

all other variables held constant. The +10% case assumes a 10% strengthening of the US dollar against all other currencies and the – 10% case assumes a 10% weakening of the US dollar.

Critical accounting policies and estimates
Our Financial Statements are prepared in accordance with accounting principles generally accepted in the UK (“UK GAAP”) and the accounting policies employed are set out under the heading “Financial Statements – Accounting Policies” on pages 66 and 67. 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, either because the areas are especially subjective or due to their complexity. 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, post-retirement benefits, share option compensation and provisions for contingent liabilities.

Revenue recognition Revenue represents sales of products (net of estimated rebates) to external third parties and excludes intercompany income and value added taxes. We also receive income from royalties and from sales of intellectual property, brands and product lines which are included in other operating income.

> Sales of products to third parties:
  Sales revenue is recorded as turnover in
  our Financial Statements and valued at
  the invoiced amount (excluding sales
  and value added taxes) less estimated
  provisions for product returns and
  rebates given to managed care and
  other customers – a particular feature in
  the US. Cash discounts for prompt
  payment are also deducted from sales.
  Revenue is recognised when title
  passes to the customer which is usually
  either on shipment or on receipt of
  goods by the wholesaler depending on
  local trading terms. Industry practice in
  the US allows wholesalers and
  pharmacies to return unused
  inventories within six months of shelf-life
  expiry. At point of sale, we estimate the
  quantity and value of goods which may


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  AstraZeneca Annual Report and
Form 20-F Information 2003
Financial Review 37




       
       
       




       

ultimately be returned. Our returns provisions are based on actual experience over the preceding 12 months, although in certain situations, for example, a new product launch or at patent expiry, further judgement may be required. When products face generic competition, we give particular attention to the possible level of returns. Overall, we believe that our estimates are reasonable.

Similarly, at the time of invoicing sales, rebates which could be paid out over the following six to nine months are estimated. These rebates typically arise from sales contracts with managed care organisations and hospitals and from Medicaid “best price” contracts. The estimates are made on a customer by customer basis taking into account specific contract provisions and are reviewed each month. We believe that we have been reasonable in our estimates for future rebates using similar methodology to that of 2002. Inevitably, however, such estimates involve judgements on future sales levels and the extent to which customers will access different incentive levels. Experience has shown that these estimates have been substantially accurate in the past.

A further feature of the US market is that sales can also be significantly influenced by wholesaler buying patterns.
Wholesalers often place orders which are significantly larger than their normal levels of demand ahead of anticipated price increases or they may seek to build up or run down their inventory levels for other reasons. If such speculative orders are shipped shortly before a quarter or year end it can result in revenue being recorded in the current financial period in respect of the following period’s underlying demand and distortion of the financial results from one period to the next. We track wholesaler inventory levels by product using our own and third party estimates and, where we believe such distortions occur, we disclose in the Annual Report for each product where shipments may be out of line with underlying prescription trends. 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. During 2003, we began negotiations with wholesalers to enter into inventory management agreements (“IMAs”) with the aim of minimising inventory movements caused by speculative purchasing. Two contracts are being entered into and more may be completed during 2004. We offer cash discounts on prompt settlement of invoices and, once again, this is a particular feature in the US, although it is seen elsewhere. We deduct cash discounts from revenue.

>   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, do not result in a material impact on reported other operating income.
   
>   Sales of intangible assets (such as intellectual property, brands and goodwill):
A consequence of charging all R&D expenditure to the profit and loss account in the year that 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 may be included on the balance sheet (see “Research and development” below). As a consequence of regular reviews of product strategy, from time to time we sell such assets and generate income. In a simple situation, the recognition of income may be easily defined but often the transfer of title can require ongoing commitment by us (for example, ongoing manufacturing arrangements, technology transfer and transfer of product licences). In these circumstances, the recognition of revenue may be deferred over the period of our ongoing commitment. Profits or losses from the sale of product related intangible assets are classified in other operating income and are stated after taking account of product disposal costs, the valuation of which includes a degree of judgement.

Research and development Our business is underpinned by our marketed products and development portfolio. The R&D expenditure to generate these products is charged to the profit and loss account in the year that it is incurred. This policy is in line with practice adopted by all major pharmaceutical companies.
Purchase of, for example, intellectual property and product rights to supplement our R&D portfolio can lead to differing accounting treatment depending on our assessment of the nature of the acquisition and the degree of risk involved. For example, payments in respect of rights to a compound in early stage development would normally be expensed immediately against income on the basis that, at this point, the probability of the compound successfully reaching the market place is still low. Payments in respect of rights to a compound in late stages of development, however, or to one already being marketed, would probably be capitalised as an intangible asset (see “Goodwill and intangible assets” below) as the prospect of success is much greater.

Goodwill and intangible assets We have significant investments in goodwill and intangible assets as a result of acquisitions of businesses and purchases of such assets as product development and marketing rights. Under UK GAAP, these are amortised over their estimated useful lives. Changes in these lives would result in different effects on the profit and loss account. We estimate that a one year reduction in the estimated useful lives of goodwill and intangible assets would increase the annual amortisation charge by $60 million. A substantial part of our investments in intangible assets and goodwill relate to the restructuring of the Astra-Merck joint venture in 1998 and we are satisfied that the carrying values are fully justified by estimated future earnings. Goodwill and intangible assets are reviewed for impairment where there are indications that their carrying values may not be recoverable and any impairments are charged to the profit and loss account. Tests for impairment are based on discounted cash flow projections, which require us to estimate both future cash flows and an appropriate risk-adjusted discount rate. Such estimates are inherently subjective. No impairments to goodwill or intangible assets (2002 $nil, 2001 $nil) were identified in 2003. Under UK GAAP, the merger of Astra and Zeneca in 1999 was recorded as a “merger of equals” (pooling of interests).



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38 AstraZeneca Annual Report and
Form 20-F Information 2003
Financial Review  




       
       
Financial Review continued      




       

Under US GAAP, the merger has been accounted for as the acquisition of Astra by Zeneca as discussed in more detail under “US GAAP information 2001 – 2003” on page 113.

Contingent liabilities In the normal course of business, contingent liabilities may arise from environmental liabilities connected with our current or former sites, from product specific and general legal proceedings, or from guarantees. Where we believe that potential liabilities have a low probability of crystallising or are very difficult to quantify reliably, we treat these as contingent liabilities. These are not provided for but are disclosed in the notes. Further details of these are set out in Note 31 on page 100. Although there can be no assurance regarding the outcome of legal proceedings, we do not expect them to have a materially adverse effect on our financial position or profitability. We also have significant commitments which are not currently recognised in the balance sheet arising from our relationship with Merck. These are described more fully in “Off-balance sheet transactions, contingent liabilities and commitments”.

Post-retirement benefits We account for the pension costs relating to the UK retirement plans under SSAP 24 and under local accounting practices for non-UK subsidiaries due to the cost and difficulty of obtaining SSAP 24 information for non-UK schemes. In all cases, the pension costs 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. SSAP 24 permits flexibility in the actuarial assumptions and bases to be used and the application of different assumptions could have a significant effect on the amounts reflected in the Financial Statements. We consider that the assumptions and bases detailed in Note

29 are appropriate for the business. The off-balance sheet aspects of post-retirement benefits are discussed on page 39.

On pages 90 to 94, we also provide additional disclosures in accordance with FRS 17. Had FRS 17 been applied in 2003, the charge to profit and loss for the major defined benefit schemes would have been approximately $247 million.

FRS 17 becomes fully operational from 1 January 2005. However, from that date the consolidated financial statements are scheduled to be prepared under international accounting principles, as discussed on page 40. Although amendments are proposed to the existing international standard to allow companies to adopt similar principles to FRS 17, these amendments have not been published.

Share option compensation
Through the Remuneration Committee we offer share options to certain employees as part of their compensation and benefits packages, designed to improve alignment of the interests of employees with shareholders. Details of these are given in Note 30. It is likely that, at some point, international, UK and US accounting standards will require share option grants to be valued and charged against income. At present, US GAAP requires some share option costs to be charged to the profit and loss account and stipulates disclosure of the cost should all eligible options be expensed (as set out on page 118). Should a requirement to expense share options be introduced, we estimate an additional charge of approximately $154 million would arise. This charge has been calculated using the Black-Scholes model as a valuation basis. Whilst this model is appropriate in valuing traded options, it is less so for employee grants as it does not take into account the restrictive features of such options. This would result in a charge

to the profit and loss account but would have no impact either on our net assets or on our current or future cash flows.

Off-balance sheet transactions, contingent liabilities and commitments
Details of our contingent liabilities and commitments are set out in Note 31 to the Financial Statements. We have no off-balance sheet entities and our hedging activities are non-speculative. The table below sets out our minimum contractual obligations at the year end.

Arrangements with Merck
Introduction

In 1982, Astra AB set up a joint venture with Merck & Co., Inc. for the purposes of selling, marketing and distributing certain Astra products in the US. In 1998, this joint venture was restructured (the “restructuring”). Under the restructuring, a US limited partnership, in which Merck is the limited partner and we are the general partner, was set up and we obtained control of the joint venture’s business subject to certain limited partner and other rights held by Merck and its affiliates. The restructuring agreements provide for the following ongoing payment and termination arrangements:

>   Annual contingent payments
>   Partial Redemption
>   First Option
>   Second Option

In addition, included in the assets and liabilities covered by the restructuring is a loan note receivable by us from Merck with face value of $1.4 billion. Each of these elements is discussed in further detail below.

Under the terms of the 1998 restructuring, the merger in 1999 between Astra and Zeneca triggered two one-time payments from us to Merck:

>   a Lump Sum Payment of $809 million, which was charged to the profit and

Contractual obligations

  Payments due by period  
 
 
  Less than                  
1 year 1-3 years 3-5 years Over 5 years Total
$m $m $m $m $m










 
Bank loans and other borrowings 152       303   455  










 
Operating leases 112   96   53   80   341  










 
Merck arrangements 180   430   225   4,677   5,512  










 
Other 382   39       421  










 
Total 826   565   278   5,060   6,729  










 

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  AstraZeneca Annual Report and
Form 20-F Information 2003
Financial Review
39




       
       
       




       
  loss account, as a result of which Merck relinquished any rights to Zeneca products; and
   
> an Advance Payment of $967 million. This Advance Payment was calculated as the then net present value of $2.8 billion discounted from 2008 to the date of payment at a rate of 13% per annum and causes Merck to relinquish any rights, including contingent payments on future sales, to Astra products with no existing or pending US patents at the time of the merger. As the Advance Payment provides us with relief from future payments, this amount has been capitalised as an intangible asset and is being amortised over 20 years. The Advance Payment is subject to a true-up in 2008, as discussed under “First Option” below.

Annual contingent payments
We make ongoing payments to Merck based on sales of certain of our products in the US (the
“contingent payments” on the “agreement products”). As a result of the 1999 merger, these contingent payments (excluding those in respect of Prilosec and Nexium) cannot be less than annual minimum sums between 2002 and 2007 ranging from $125 million to $225 million. Our payments have exceeded the minimum level in 2003 and 2002 and we have no reason to believe that the annual payments in the future will fall below the minimum obligations.

Partial Redemption
In 2008, there will be a partial redemption of Merck
’s limited partnership interest – which will end Merck’s rights to contingent payments in respect of certain of the agreement products – by distribution to Merck of an amount calculated as a multiple of the average annual contingent payments from 2005 to 2007 on the relevant products, plus $750 million.

First Option
In 2008, a calculation will be made of the Appraised Value, being the net present value of the future contingent payments in respect of all agreement products not covered by the Partial Redemption, other than Prilosec and Nexium. Payment of this amount to Merck in 2008 is, however, contingent on Merck
’s exercise of the First Option. Exercise of the First Option will require us to re-purchase Merck’s interest in these products. Should Merck not exercise

this option in 2008, we may exercise it in 2010 for a sum equal to the 2008 Appraised Value. If neither Merck nor we exercise the option, the contingent payment arrangements in respect of these agreement products will continue and the Appraised Value will not be paid.

In addition, in 2008 there will be a true-up of the Advance Payment. The calculation of this will be based on a multiple of the average annual contingent payments from 2005 to 2007 in respect of all the agreement products with the exception of Prilosec and Nexium (subject to a minimum of $6.6 billion), plus other defined amounts (totalling $912 million). It is then reduced by the Appraised Value (whether paid or not), the Partial Redemption and the Advance Payment (at its undiscounted amount of $2.8 billion) to determine the true-up amount. The true-up will be settled in 2008 irrespective of whether the First Option is exercised and this could result in a further payment by us to Merck or a payment by Merck to us.

Should Merck exercise the First Option in 2008, we will make payments in respect of the Partial Redemption, the First Option and the true-up totalling a minimum of $4.7 billion. If we exercise the First Option in 2010, the combined effect will involve a minimum aggregate amount payable to Merck in 2008 and 2010 of the same amount.

Loan note receivable
In 2008, at the same time as the settlement of the Partial Redemption and the true-up, Merck will settle the loan note receivable by paying us $1.4 billion.

Second Option
A Second Option exists whereby we have the option to re-purchase Merck’s interests in Prilosec and Nexium in the US. This option is exercisable by us two years after the exercise of the First Option, whether the First Option is exercised in either 2008 or 2010. Exercise of the Second Option by us at a later date is also provided for in 2017 or if combined annual sales of the two products fall below a minimum amount provided, in each case, that the First Option has been exercised. The exercise price for the Second Option is the fair value of these product rights as determined at the time of exercise.

If the Second Option is exercised, Merck will have no further rights to contingent payments from us.

Accounting treatment
The precise amount of settlements with Merck under the Partial Redemption and the First Option cannot be determined at this time, as some of the payments are calculated based on trading performance between 2005 and 2007, and another is contingent upon Merck exercising the First Option. If Merck exercises the First Option in 2008, the net minimum payment to be made to Merck, being the combined payments of $4.7 billion less the repayment of the loan note of $1.4 billion, would be $3.3 billion.

In accounting for the restructuring in 1998, the loan note was included in the determination of the fair values of the assets and liabilities acquired. The loan note was ascribed a fair value of zero on acquisition and on the balance sheet because we estimate that the net minimum payment of $3.3 billion equated to the fair value of the trading rights to be acquired under the Partial Redemption and First Option.

We consider that the payments described under the headings above, including the Second Option, represent the acquisition of future trading rights as they relieve us of the obligations to make contingent payments to Merck – these reliefs will commence from the dates the payments are made. Accordingly, the future acquisition of these trading rights will be reflected in the Financial Statements only when the payments are made. The trading rights will be accounted for under the extant guidance when the payments are made, with allocations to intangibles and goodwill, as appropriate.

The annual contingent payments are expensed as incurred.

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 profit and loss account 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 pensionable pay. The UK and US schemes were closed to new entrants in 2000. All new employees in these countries are offered defined contribution schemes.



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40 AstraZeneca Annual Report and
Form 20-F Information 2003
Financial Review




       
       
Financial Review continued      




       

Under FRS 17, the disclosures on page 92 highlight a deficit of $883 million, after deferred tax, for the major Group post-retirement defined benefit schemes. FRS 17 prescribes detailed rules for the calculation of scheme assets and liabilities and indicates the net accounting surplus or deficit that exists at the balance sheet date. Fluctuations in investment conditions and/or FRS 17 prescribed assumptions can result in significant volatility in the surplus or deficit. Pension and other post-retirement schemes, however, are managed over the long term. Investment and liability decisions are based on underlying actuarial and economic circumstance with the intention of ensuring that the schemes have sufficient assets to meet liabilities as they fall due, rather than meeting accounting requirements. This actuarial approach tends to produce less volatility than is likely under FRS 17.

The overall deficit in the major defined benefit schemes increased from $1,233 million at 31 December 2002 to $1,313 million at 31 December 2003. This increase is due primarily to the effects of changes in underlying assumptions with regard to scheme liabilities. Exchange has also had an effect. For example, in the largest scheme, in the UK, plan assets have increased in sterling from £2,048 million to £2,385 million, reflecting strong performance (the plan’s investment return was 13.4%, 2.6% higher than the benchmark derived from aggregating individual investment managers’ objectives) and a one-off cash contribution of £100 million in November. Liabilities have increased from £2,555 million to £2,875 million. As a result, the deficit has fallen from £507 million to £490 million. At the last actuarial valuation at 31 March 2003, the market value of the UK fund’s assets represented 89.1% of its liabilities as valued on the actuary’s funding basis. The one-off contribution we made, referred to above, brought the solvency ratio to around 95%. The trustee manages both investments and liabilities closely and follows a strategy of awarding mandates to specialist, active investment managers. We have indicated our intention to restore full solvency over a period of around 15 years.

New accounting standards
New UK or US applicable accounting standards which have been issued (both adopted and not yet adopted) are discussed on pages 60 and 114 respectively.

International accounting
Under current European proposals, we will be required to adopt International Financial Reporting Standards (‘IFRSs’) and International Accounting Standards (‘IASs’) in the preparation of our Financial Statements from 2005 onwards. The international standard setter, the International Accounting Standards Board (‘IASB’), has undertaken an extensive exercise to develop new standards and improve existing ones. This work is ongoing and publication of the resulting standards will be completed in early 2004. At present, these new standards are not operational and under the current international standards, in our opinion, our net profit and shareholders’ funds are not significantly different from those presented under UK GAAP.

Our project to manage the transition of financial reporting from UK GAAP to international accounting has completed initial assessments of the impact on our results and net assets. As noted above, the IFRSs which will be mandatory in 2005 have not all been issued and, accordingly, it is not possible to discuss with certainty all the details of the effects of the transition at present. In addition, certain IFRSs may be issued before 2005 that we may decide to adopt early and the effects of these adoptions, if any, cannot be quantified at present. However, we believe that the major areas of impact on our net profit and shareholders’ funds will be share-based payments, goodwill amortisation, deferred tax and pensions.

The following information is provided in accordance with US requirements.

Results of operations – summary analysis of year to 31 December 2002
The tables on page 41 show our sales by therapy area and operating profit for 2002 compared to 2001.

Reported performance
Our sales grew by $1,619 million to a total of $17,841 million in 2002, an increase of 10%. Operating costs rose by $1,419 million resulting in an improvement in operating profit before exceptional items of $200 million or 5%. The weaker US dollar increased our reported sales growth by 1% whilst there was no significant currency effect on operating profit growth. Earnings per share after exceptional items decreased from $1.65 to $1.64.

Underlying performance
After adjusting for beneficial exchange effects of $111 million, our sales increased by 9% from $16,222 million in 2001 to $17,841 million in 2002. Operating profit before exceptional items rose by 5%. Earnings per share before exceptional items grew by 7% from $1.73 to $1.84.

Our sales growth for the year was impacted significantly by the decline in our Losec/Prilosec sales, which fell by 18%. If this effect is excluded, the sales growth is 23%, strong evidence of the positive underlying momentum of our business. This growth was fuelled by a trebling of Nexium sales which more than offset the declines in Losec/Prilosec resulting in a 7% growth in Gastrointestinal sales. This was complemented by strong performances from the Neuroscience (up 21%), Respiratory (up 16%) and Oncology (up 12%) product ranges. Generic competition for Zestril resulted in a sales growth for Cardiovascular products of just 1%.

The successful launches of Faslodex in the US, Iressa in Japan and Symbicort outside the US, combined with Nexium sales, generated nearly $2.4 billion in sales in 2002 (up from $651 million in 2001). Five other growth products we highlight in our portfolio Casodex, Arimidex, Atacand, Seroquel, and Zomig grew by another $900 million (to just over $3 billion in aggregate).

We discuss the performances of the therapy areas and the individual products in those areas in more detail in the appropriate sections of the Operational Review.

Geographic analysis
In the US, sales increased by 10% for the full year. Excluding Prilosec, sales growth was 33%, with excellent performances from Nexium , Seroquel, Toprol-XL, Pulmicort Respules and Arimidex. Strong sales performance in France (up 13% to $1,140 million) and Italy (up 16% to $765 million) more than offset declining sales in Germany and the UK, resulting in a 5% increase in Europe for the full year. Sales growth was driven by Nexium, Symbicort, Casodex and
Seroquel. A strongly performing product range in Oncology (including the excellent uptake for Iressa) and continued strong growth in Losec (up 40%) fuelled the 21% sales growth in Japan for the full year. Sales reached $977 million in 2002, up from $851 million in 2001.



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  AstraZeneca Annual Report and
Form 20-F Information 2003
Financial Review 41




       
       
       
       




We discuss the geographic performances in more detail in the appropriate sections of the Geographic Review on pages 21 to 22.

Operating margin and retained profit
Operating profit before exceptional items increased by 5% to $4,356 million. Operating margin of 24.4% was 1.2 percentage points below the prior year. Currency impacts reduced margin by 0.3 points whilst the other 0.9 points reduction was largely due to lower other operating income. Elsewhere, improved product mix and lower Merck payments reduced cost of sales by 0.6 points to 25.3% of sales whilst SG&A growth was broadly in line with sales growth. R&D increased by 0.6 points to 17.2% of sales, principally due to the growth in clinical trial costs. In aggregate, underlying R&D and SG&A grew by around 10%. Other operating income fell from $368 million to $243 million reflecting both lower royalty income and product disposal gains.

As discussed previously, the US Department of Justice conducted a civil and criminal investigation into the sale and marketing of Zoladex (goserelin acetate implant) and at the end of 2002, the Company and federal and state authorities were in the process of negotiating a

potential settlement of the civil and criminal claims at issue in the investigation. As a result, although no final agreement had been concluded, we believed it appropriate to accrue $350 million to cover estimated settlement costs as an exceptional item.

Interest and dividend income was $31 million (2001 $113 million) for the full year and included the effects of some small exchange and revaluation losses.

Excluding exceptional items, the effective tax rate for the full year 2002 was 26.8% compared with 28.4% for 2001. No tax relief was provided on the exceptional item charge in 2002.

Financial position
The net book value of our assets increased from $9,629 million at 31 December 2001 to $11,226 million at 31 December 2002. The increase was driven by the net profit for the year of $2,836 million and consolidation translation gains of $1,110 million, offset by re-purchases of shares and the 2002 dividends, amounting to $1,190 million and $1,206 million, respectively.

Cash flow
Before exceptional cash expenditure, we

generated $5,686 million cash inflow from operations in 2002, significantly higher than the corresponding figure of $4,130 million in 2001. Higher profits before depreciation and amortisation contributed $300 million and there were significant working capital inflows, particularly from stocks and creditors. Expenditure on exceptional items was $275 million lower than in 2001 as the integration and synergy programmes reached their conclusion. Tax cash outflows at $795 million were marginally higher than 2001 whilst cash inflows from interest fell to $35 million as a result of lower returns. We applied the remaining cash in continuing our share re-purchase programme (up $110 million from 2001 to $1,190 million), continued investment in fixed assets (broadly similar to 2001 at $1,608 million) and dividends ($1,234 million). As a result, our net cash inflow before non-equity financing was $902 million compared to an outflow in 2001 of $691 million.

Investments, divestments and capital expenditure
There were no significant acquisitions or disposals in 2002. Our cash expenditure in 2002 on fixed assets (including intangible assets, goodwill and fixed asset investments) totalled $1,543 million (net of


Sales by therapy area (2002 and 2001)                        
          Growth              
          due to              
  Growth   Growth   exchange       Growth   Growth  
  2002   underlying   effects   2001   underlying   reported  
  $m   $m   $m   $m   %   %  












 
Cardiovascular 3,569   54   32   3,483   1   2  












 
Gastrointestinal 6,664   427   47   6,190   7   8  












 
Infection 440   42       398   11   11  












 
Neuroscience 2,418   417   4    1,997   21   21  












 
Oncology 2,369   264   (6  ) 2,111   12   12  












 
Respiratory and Inflammation 1,818   252   27   1,539   16   18  












 
Other pharma 65   (13 )  (3 ) 81   (17 ) (20 )












 
Others 498   65   10   423   15   18  












 
Total 17,841   1,508   111   16,222   9   10  












 
 
Operating profit excluding exceptional items (2002 and 2001)                        
          Growth              
          due to              
      Growth   exchange       Growth   Growth  
  2002   underlying   effects   2001   underlying   reported  
  $m   $m   $m   $m   %   %  












 
Sales 17,841   1,508   111   16,222   9   10  












 
Cost of sales (4,520 ) (302 ) (20 ) (4,198 ) 7   8  












 
Other operating costs (9,208 ) (842 ) (130 ) (8,236 ) 10   12  












 
Other operating income 243   (140 ) 15   368   (38 ) (34 )












 
Operating profit 4,356   224   (24 ) 4,156   5   5  












 

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42 AstraZeneca Annual Report and
Form 20-F Information 2003
Financial Review




       
       
       
Financial Review continued      




       

disposals of $66 million). This expenditure was broadly similar to the last two years and includes the elements discussed above together with a further instalment to purchase marketing rights of $146 million. The capital expenditures are financed from internally generated funds.

US GAAP information 2001 – 2003
Our Financial Statements have been prepared in accordance with UK GAAP which differs in certain significant respects from US GAAP. In particular, under US GAAP, the AstraZeneca merger has been accounted for as a purchase accounting acquisition of Astra AB (Astra) by Zeneca Group PLC (Zeneca). Although there are several differences between our net income and assets under UK and US GAAP, the difference in accounting for the merger with Astra represents substantially all of the adjustments.

Results of continuing operations (US GAAP)
2003 compared with 2002

Sales from continuing operations rose from $17,841 million to $18,849 million. Strong performances from key growth and launch products, together with exchange effects, compensated for lost sales from patent expired products.

Net income and earnings per share were largely unchanged from 2002 at $2,268 million and $1.33, respectively. Higher amortisation and share-based payment charges and lower gains from deferred income and derivative financial instruments were offset by lower tax and the absence of the Zoladex exceptional costs.

The annual impairment tests on our US GAAP goodwill balances resulted in no impairments at 31 December 2003.

Further details of the impact of the differences between UK GAAP and US GAAP are set out in the Additional Information for US Investors on pages 113 to 123.

2002 compared with 2001
The US GAAP treatment of the merger under purchase accounting gave rise to additional goodwill and intangible assets with net book values at 31 December 2002 of $12,692 million and of $7,479 million, respectively. Following the adoption of SFAS 142, we no longer amortise the goodwill, but perform annual impairment tests on all our US GAAP goodwill balances. These tests show that our US GAAP goodwill balances were not impaired at 31 December 2002.

Sales from continuing operations rose from $16,222 million in 2001 to $17,841 million in 2002. The principal drivers of this growth were improved performances from Nexium, Symbicort and Seroquel, offset by falls in Zestril and Losec/Prilosec.

Net income under US GAAP has increased from $1,397 million to $2,307 million. These increases are as a result of both higher sales and the cessation of amortisation of goodwill. We estimate that the latter has improved profit by $755 million.

Taxation
Taxation in 2003 amounted to $965 million, an effective rate of 30%, about 1% lower than 2002.

In 2002, total taxation amounted to $1,035 million, an effective rate of 31% compared with 44.8% in 2001. The cessation of amortisation of goodwill, which did not attract tax relief, was the major factor in the rate improvement.

Cash flow
Operating activities in 2003 resulted in a cash inflow of $3,416 million, down from $4,833 million in 2002. Working capital increases and exceptional item costs (primarily the Zoladex investigation settlement) were the main reasons behind the decline. Total cash outflow in respect of investing activities was $746 million; inflows from liquidation of short term investments of $771 million and the sale of Marlow Foods

reduced the costs of fixed asset investing of $1,597 million. The financing outflows represented absorption of funds in respect of dividends ($1,222 million), share repurchases ($1,154 million) and loan repayments of $345 million.

In 2002, operating activities produced cash inflows of $4,833 million after tax outflows of $795 million and interest inflows of $46 million. There was a cash outflow in respect of investing activities of $2,349 million, reflecting further investment in short term investments and fixed deposits. Financing cash outflows absorbed $2,506 million through the share re-purchase programme ($1,190 million) and dividends ($1,234 million).

In 2001, operating activities generated net cash of $3,126 million after exceptional cash outflows of $368 million. There was a cash outflow in respect of investing activities of $1,327 million, comprising mainly of capital expenditure of $1,582 million. Financing cash outflows totalled $2,195 million, the principal payments being in respect of the share re-purchase programme ($1,080 million) and equity dividends ($1,236 million).

Net assets
Net assets at 31 December 2003, in accordance with US GAAP, are significantly higher than those under UK GAAP as a result of the acquisition accounting for Astra. The goodwill arising on the acquisition of Astra had a net book value of $14.3 billion ($12.7 billion at 31 December 2002) and fixed asset adjustments added $7.7 billion ($7.7 billion at 31 December 2002). These effects were partly offset by approximately $2.3 billion ($2.3 billion in 2002) of other adjustments being principally deferred tax liabilities related to the acquisition. Of our net asset value under US GAAP at 31 December 2003 of $33.7 billion, $17.6 billion is attributable to fixed assets, $15.3 billion to goodwill and $3.2 billion to deferred tax. The movement from 2002 was as a result of exchange offset by amortisation.

 


Income, shareholders’ equity and cash flow under US GAAP            
  2003   2002   2001  
  $m   $m   $m  






 
Operating income 3,233   3,342   2,474  






 
Net income for the year 2,268   2,307   1,397  






 
Shareholders’ equity 33,654   30,183   27,402  






 
Decrease in cash (4 ) (22 ) (396 )






 

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  AstraZeneca Annual Report and
Form 20-F Information 2003
Directors’ Report 43




       
Directors Report      




       

AstraZeneca PLC is the holding company for a group of subsidiaries whose principal activities are described in the Operational and Financial Reviews on pages 9 to 42, which are incorporated in this report by reference. Principal subsidiaries and their locations are given on page 112.

The Company’s dividend for 2003 of $0.795 (45.3 pence, SEK 5.98) per Ordinary Share amounts to a total dividend payment to shareholders of $1,350 million.

The Directors believe that the Company and its subsidiaries have adequate resources to continue in operational existence for the foreseeable future and therefore continue to adopt the going concern basis in preparing the Financial Statements.

Changes in the Company’s Ordinary Share capital during 2003, including details of the allotment of new shares under the Company’s share plans, are given in Note 35 to the Financial Statements.

Board of Directors
Details of members of the Board at 31 December 2003 are set out on pages 6 and 7.

The Board met six times during 2003. Each meeting was attended by all of its members except that Michele Hooper, Joe Jimenez and Erna Möller were unable to attend the September meeting and Jane Henney was unable to attend the October meeting due to other commitments.The Board is currently scheduled to meet six times in 2004.

Board changes
Åke Stavling, Executive Director, left the Company at the end of January 2003.

In July 2003, the Board appointed Michele Hooper and Joe Jimenez as Non-Executive Directors.

At the end of August 2003, Håkan Mogren ceased to be Executive Deputy Chairman and became Non-Executive Deputy Chairman.

Election and re-election of Directors
All of the Directors will retire under Article 65 of the Company’s Articles of Association at the Annual General Meeting (AGM) in April 2004. The Notice of AGM will give details of

those Directors presenting themselves for election or re-election at the AGM.

Mandatory shareholding for Directors
The Company’s Articles of Association require each Director to be the beneficial owner of Ordinary Shares in the Company with an aggregate nominal value of $125 (500 shares). Such holding must be obtained within two months of the date of the Director’s appointment. All of the Directors comply with this requirement and full details of each Director’s interests in shares of the Company are set out in the Directors’ Remuneration Report on pages 50 to 59.

Annual General Meeting
The Company’s AGM will be held on 29 April 2004. The principal meeting place will be in London. There will be a simultaneous satellite meeting in Stockholm.

Corporate governance
UK Combined Code on Corporate Governance
In July 2003, the Financial Reporting Council in the UK issued the revised Combined Code on Corporate Governance which superseded and replaced the Combined Code published by the Hampel Committee on Corporate Governance in 1998. It applies for reporting years beginning on or after 1 November 2003.

Although the Company is not strictly required to report against the revised Combined Code until its Directors’ Report for 2004, the Board did review the revised Combined Code at its meeting in October 2003 and has prepared this Directors’ Report with reference to the revised Combined Code.

The Company is applying all of the main and supporting principles of good governance in the revised Combined Code. The way in which these principles are being applied is described below.

The Company is complying with all of the provisions of the revised Combined Code.

The US Sarbanes-Oxley Act of 2002
AstraZeneca PLC American Depositary Shares are traded on the New York Stock Exchange (NYSE) and the Company is subject to the reporting and other requirements of the US Securities and Exchange Commission (SEC) applicable to

foreign issuers. The US Sarbanes-Oxley Act came into force at the end of July 2002. As a result of its NYSE listing, the Company is subject to those provisions of the Act applicable to foreign issuers.

The Company either already complies with or will comply with those provisions of the Act applicable to foreign issuers as and when they become effective. The Board believes that, prior to the Act coming into force, the Company already had a sound corporate governance framework, good processes for the accurate and timely reporting of its financial position and results of operations and an effective and robust system of internal controls. Consequently, the Company’s approach to compliance with the Act has principally involved the development and adjustment of its existing corporate governance framework and associated processes concerning reporting, internal controls and other relevant matters.

Particular work relevant to the Act undertaken in the last 12 months included revisions to the AstraZeneca Code of Conduct, certain changes to the Company’s disclosure controls and procedures, Disclosure Policy and the operation of the Disclosure Committee and various developments concerning the Audit Committee and its work. All of these matters are described in more detail below. The Company also started the work necessary to enable it to comply in due course with the SEC rules which implement section 404 of the Act. Following the implementation of this section of the Act, the management of companies will be required to state its responsibility for establishing and maintaining an adequate internal control structure and procedures for financial reporting and annually assess the effectiveness of that structure and those procedures. The external auditor will be required to attest to and report on management’s assessment. These provisions become effective for the Company in 2005 and preparatory work will continue during 2004.

The New York Stock Exchange
In November 2003, the SEC approved the NYSE’s new corporate governance listing standards. The Company, as a foreign issuer with American Depositary Shares listed on the NYSE, is generally obliged to disclose any significant ways in which its corporate governance practices differ from



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44 AstraZeneca Annual Report and
Form 20-F Information 2003
Directors’ Report




       
Directors Report continued      




       

these standards. The exception to this is that the Company must comply fully with the provisions of the listing standards which relate to the composition, responsibilities and operation of audit committees. These provisions incorporate the rules concerning audit committees implemented by the SEC under the US Sarbanes-Oxley Act of 2002.

The Company has reviewed the NYSE’s new listing standards and believes that its corporate governance practices are generally consistent with the standards, with one exception. The standards state that non-executive directors must have regularly scheduled meetings without the directors involved in the management of the company present. Other than meetings of those Board committees comprised only of Non-Executive Directors, the Company’s Non-Executive Directors have not to date held scheduled, formal meetings without the Executive Directors of the Company present.

The Company’s Audit Committee complies with the provisions of the listing standards which relate to the composition, responsibilities and operation of audit committees. More detailed information about the Audit Committee and its work during 2003 are set out in the Audit Committee’s Report on pages 48 to 50.

Disclosure Policy
The Company’s original Disclosure Policy approved by the Board in October 2002 principally provided a framework for the handling and disclosure of price sensitive information. The Chief Financial Officer, the Group Secretary and Solicitor and the Vice-President, Corporate Affairs are the members of the Disclosure Committee. During 2003, the Disclosure Committee met regularly to assist and inform the decisions of the Chief Executive concerning price sensitive information and its disclosure. Also during the year, the Company’s disclosure controls and procedures, Disclosure Policy and the operation of the Disclosure Committee were reviewed. A number of changes were approved by the Board in January 2004. These changes were designed to enhance the role of the Senior Executive Team concerning disclosure controls and procedures and assist the Disclosure Committee’s role in assuring that appropriate processes are operating for the Company’s planned disclosures, such as its quarterly results announcements and annual business review days.

Board structure and processes
Board composition, responsibilities and appointments
The Board comprises Executive and Non-Executive Directors. In the view of the Board, the majority of Board members excluding the Chairman are independent Non-Executive Directors. The differing roles of Executive Directors and Non-Executive Directors are clearly delineated, with both having fiduciary duties towards shareholders and all being collectively responsible for the success of the Company. However, Executive Directors have direct responsibility for business operations whereas the Non-Executive Directors have a responsibility to bring independent, objective judgement to bear on Board decisions. This includes constructively challenging management and helping to develop the Company
’s strategy. The Non-Executive Directors scrutinise the performance of management and have various responsibilities concerning the integrity of financial information, internal controls and risk management. To help maintain a strong executive presence on the Board in addition to the two Executive Directors (the Chief Executive and the Chief Financial Officer), Board meetings are attended by two members of the Senior Executive Team.

The Board sets the Company’s strategy and policies and monitors progress towards meeting its objectives. It also assesses whether its obligations to the Company’s shareholders and others are understood and met. This includes regular reviews of the Company’s financial performance and critical business issues. The Board met six times in 2003.

There is an established and transparent procedure for appointments of new directors to the Board which is operated by the Nomination Committee. All of the Directors retire at each AGM and may offer themselves for re-election by shareholders.

At its meeting in December 2003, the Board reviewed and assessed how it operates. This included consideration and discussion of the nature and level of its interaction with the Company’s management; the quality, quantity and coverage of information which flows to the Board from management; the balance of the Board’s time spent considering strategic issues compared to other matters; the content of Board meetings and presentations to Board

meetings; the composition of the Board; the practical arrangements for the work of the Board; and the work and operation of the Board’s committees. Overall, Board members concluded that the Board and its committees were operating in an effective and constructive manner.

At the same meeting, the Chairman also reported to the Board on his conversations with each Non-Executive Director about their individual performance and that of the Board as a whole, which took place during the fourth quarter of 2003. The Chairman then left the meeting while Sir Peter Bonfield, senior Non-Executive Director, led a review of the Chairman’s performance. On the Chairman’s return to the meeting, the Board reviewed the performance of the Chief Executive and the Chief Financial Officer who, in each case, left the meeting while the review took place.

The Company maintained directors’ and officers’ liability insurance cover throughout 2003. Cover was renewed at the beginning of 2004.

Independence of Directors under the
UK Combined Code

At its meeting to review the revised Combined Code in October 2003, the Board considered the independence of each Non-Executive Director. With the exception of two of them as set out below and the Chairman, the Board considers that all of the Non-Executive Directors are independent in character and judgement and that there are no relationships or circumstances which are likely to affect their independent judgement.

For the reasons explained below, the Board does not believe that Håkan Mogren, Non-Executive Deputy Chairman or Marcus Wallenberg can be determined independent under the revised Combined Code. However, the Board believes that both Dr Mogren and Mr Wallenberg bring considerable business experience and make valuable contributions to the work of the Board.

Dr Mogren was previously the Chief
Executive Officer of Astra AB and Executive Deputy Chairman of the Company. Both Dr Mogren and Mr Wallenberg are members of the Board of Directors of Investor AB, a company which, at 31 December 2003, had a 5% holding in the Ordinary Shares of the Company. This holding represents a



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  AstraZeneca Annual Report and
Form 20-F Information 2003
Directors’ Report 45




       
       
       




       

significant proportion of Investor AB’s overall investment portfolio. Additionally, Mr Wallenberg is the Chief Executive Officer of Investor AB.

The Board also considered, in particular, the positions of Sir Peter Bonfield, senior Non-Executive Director and Erna Möller. For the reasons explained below, it is the Board’s view that Sir Peter and Professor Möller are independent. Both Directors discharge their duties in a properly independent manner and constructively and appropriately challenge the Executive Directors and the Board.

Sir Peter is a Non-Executive Director of Telefonaktiebolaget LM Ericsson. Marcus Wallenberg is also a Non-Executive Director of Ericsson. Investor AB, of which Mr Wallenberg is Chief Executive Officer, holds approximately 5% of Ericsson’s shares (representing approximately 38% of the voting rights). The Board is satisfied that Sir Peter’s presence on the Ericsson Board results from his broad experience of the global telecommunications industry and not from any connection with Investor AB or the Wallenberg family. The Board also had regard to the length of time which Sir Peter has served as a Non-Executive Director of the Company (he was first appointed in 1995). As the position was only established in 2002, the Board wishes Sir Peter to continue in his current role as the senior Non-Executive Director of the Company for two or three years more to provide further continuity, subject to his re-election at Annual General Meetings.

Professor Möller is the Chief Executive Officer of the Board of the Knut and Alice Wallenberg Foundation, a charitable foundation in Sweden which supports scientific research and educational programmes by awarding financial grants to individuals or institutions. Although one of the Foundation’s principal investments is in Investor AB, all investment decisions of the Foundation are made by its investment committee of which Professor Möller is not a member. Her role, as Chief Executive Officer of the Board, is principally to lead the scrutiny of applications for grants and maintain close contacts with scientific and educational institutions in Sweden to develop the work of the Foundation.

Chief Executive and the Senior Executive Team
The Chief Executive, Sir Tom McKillop, has delegated authority from, and is responsible to, the Board for directing and promoting the profitable operation and development of the Company, consistent with the primary aim of enhancing long term shareholder value.

The Chief Executive is responsible to the Board for the management and performance of the Company’s businesses within the framework of Company policies, reserved powers and routine reporting requirements. He is obliged to refer certain major matters (defined in the formal delegation of the Board’s authority) back to the Board. The roles of the Board, the Board’s committees, the Chairman, the Chief Executive and the Senior Executive Team are documented, as are the Company’s delegated authorities and reserved powers, the means of operation of the business and the roles of corporate functions.

The Chief Executive has established and chairs the Senior Executive Team. While the Chief Executive retains full responsibility for the authority delegated to him by the Board, the Senior Executive Team is the vehicle through which he exercises that authority in respect of the Company’s business (including Salick Health Care and Astra Tech).

The members of the Senior Executive Team are Jonathan Symonds, Chief Financial Officer; Bruno Angelici, Executive Vice-President, Europe, Japan, Asia Pacific and ROW; David Brennan, Executive Vice-President, North America; Jan Lundberg, Executive Vice-President, Discovery Research; John Patterson, Executive Vice-President, Product Strategy & Licensing and Business Development; Martin Nicklasson, Executive Vice-President, Development; Barrie Thorpe, Executive Vice-President, Operations; and Tony Bloxham, Executive Vice-President, Human Resources.

The Senior Executive Team normally meets once a month to consider and decide all major business issues. It also usually reviews those matters which are of a size or importance to require the attention of, or which are reserved to, the Board before such matters are submitted to the Board for review and decision.

Each business function is subject to an annual budget and target-setting process including forecasts for the following two years together with a sensitivity and risk analysis, quarterly updates of the forecast for the current year and regular reporting. Performance reviews are undertaken in each part of the business regularly. The Company’s quarterly business performance management system uses a broad range of measures that link directly to the achievement of key business priorities. Treasury operations are centralised, operate within defined limits and are subject to regular reporting requirements and Audit Committee reviews.

Internal controls and management of risk
The Board has overall responsibility for the Company’s system of internal controls which aims to safeguard shareholders’ investments and the Company’s assets, ensure that proper accounting records are maintained and that the financial information used within the business and for publication is accurate, reliable and fairly presents the financial position of the Company and the results of its business operations. The Board is also responsible for reviewing the effectiveness of the system of internal controls. The system is designed to provide reasonable assurance of effective operations and compliance with laws and regulations, although any system of internal controls can only provide reasonable, not absolute, assurance against material misstatement or loss.

Since the publication in September 1999 by the Institute of Chartered Accountants in England and Wales of the Turnbull Report, ‘Internal Control: Guidance for Directors on the Combined Code’, the Directors have continued to review the effectiveness of the Group’s system of non-financial controls, including operational and compliance controls, risk management and the Company’s high level internal control arrangements. These reviews have included an assessment of internal controls, and in particular internal financial controls, by the internal audit function, management assurance of the maintenance of control and reports from the external auditor on matters identified in the course of its statutory audit work. A key part of these reviews is an annual ‘letter of assurance’ process by which responsible managers confirm the adequacy of their systems of internal financial and non-financial controls,



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46 AstraZeneca Annual Report and
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Directors Report continued      




       

their compliance with Company policies (including those relating to safety, health and the environment), local laws and regulations (including the industry’s regulatory requirements) and report any control weaknesses identified in the past year. The Directors believe that the Company maintains an effective embedded system of internal controls and complies with the Turnbull Report guidance.

The Company views the careful management of risk as a key management activity. Managing business risks to deliver opportunities is a key element of all activities. This is done using a simple and flexible framework which provides a consistent and sustained way of implementing the Company’s values. These business risks, which may be strategic, operational, reputational, financial or environmental, should be understood and visible. The business context determines in each situation the level of acceptable risk and controls.

Much of the Company’s work in the area of risk management is facilitated by the Risk Advisory Group consisting of representatives from each business function. Its role is advisory and is to assist senior management to identify and assess the main risks faced by the Company’s business in a co-ordinated manner, to assess, identify and document the Company’s risk profile and to ensure that the business focuses on critical business issues. It is chaired by the Chief Financial Officer and reports twice a year to the Senior Executive Team. The Risk Advisory Group’s reports on the Company’s risk profile are reviewed by both the Audit Committee and the Board.

Under the auspices of the Risk Advisory Group, the Company has developed and is establishing an integrated risk management framework with the aim of continuing to ensure that the business understands the key risks it faces, especially cross-functional risks, has an embedded risk management approach to all of its activities, links risk management to business performance reporting and seeks continuous improvement in the management of risk by sharing best practice throughout the organisation.

Code of Conduct
The policy of the Company is to require all of its subsidiaries, and their employees, to

observe the highest ethical standards of integrity and honesty and act with due skill, care, diligence and fairness in the conduct of business. The Company’s management recognises that such standards make a significant contribution to the overall control environment and seeks, by its words and actions, to reinforce them throughout the business. In particular, all employees are required to comply with the letter and spirit of the AstraZeneca Code of Conduct and with the high ethical standards detailed by the Company in support of it.

During the year, the Code of Conduct was reviewed and revised. The amended version was approved by the Board in July 2003. The revised AstraZeneca Code of Conduct is set out in full on pages 138 and 139. It is an important demonstration of the Company’s uncompromising commitment to honesty and integrity. To coincide with the launch of the new Code of Conduct, the Company also updated and extended its procedures for raising integrity concerns which include a confidential helpline for employees worldwide. In September 2003, the Company adopted a Finance Code of Conduct which complements the main AstraZeneca Code of Conduct and applies to the Chief Executive, the Chief Financial Officer and the Company’ s principal accounting officers. The Finance Code of Conduct also applies to all Finance function employees and reinforces the importance of the integrity of the Company’s accounts, the reliability of the accounting records on which they are based and the robustness of the relevant controls and processes.

Group Internal Audit
Group Internal Audit (GIA) is an independent appraisal function which derives its authority from the Board through the Audit Committee. Its primary role is to provide reasonable and objective assurance about the adequacy and effectiveness of the Company’s financial control framework and risk management.

GIA seeks to discharge the responsibilities set down in its charter by reviewing the processes which ensure that business risks are effectively managed; reviewing the financial and operational controls which help to ensure that the Company’s assets are properly safeguarded from losses, including fraud; reviewing the controls which help to ensure the reliability and integrity of management information systems; reviewing the processes which ensure

compliance with corporate objectives, policies and procedures and external legislation and regulation (other than those relating to safety, health and the environment and product regulatory compliance which are the responsibility of other audit functions); and on an ad hoc basis, reviewing that value for money is obtained.

GIA also acts as a source of constructive advice and best practice, assisting senior management with its responsibility to improve the processes by which business risks are identified and managed and to report and advise on the proper and effective use of resources.

External auditor
A resolution will be proposed at the AGM on 29 April 2004 for the re-appointment of KPMG Audit Plc, London as auditor of the Company.

The external auditor has undertaken various non-audit work for the Company during 2003. More information about this work and the fees paid by the Company for it are set out in Note 33 to the Financial Statements on page 107. The external auditor is not engaged by the Company to carry out any non-audit work on which it might, in the future, be required to express an audit opinion. As explained more fully in the Audit Committee’s Report on pages 48 to 50, the Audit Committee has established pre-approval policies and procedures for audit and non-audit work permitted to be carried out by the external auditor and has carefully monitored the objectivity and independence of the external auditor throughout 2003.

Board committees
Audit Committee
Full details about the Audit Committee, its composition, remit and work during 2003 can be found in the Audit Committee’s Report on pages 48 to 50.

Remuneration Committee
The members of the Remuneration
Committee are Sir Peter Bonfield (Chairman of the Committee), John Buchanan and Erna Möller. They are all Non-Executive Directors. The Board considers them all to be independent.

The remit of the Remuneration Committee is, primarily, to recommend for decision by the Board the fundamental remuneration policy for the Company and to ensure the proper operation of all plans for employees



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Directors’ Report
47




       
       
       




       

involving the Company’s shares. More particularly, it makes specific proposals in respect of the remuneration packages of individual Executive Directors and the Company’s most senior executives.

Further information about the membership and work of the Remuneration Committee and the Company’s remuneration policy and practice is set out in the Directors’ Remuneration Report on pages 50 to 59.

Nomination Committee
The members of the Nomination Committee are Percy Barnevik (Chairman of the Committee), Håkan Mogren, Sir Peter Bonfield, Jane Henney and Joe Jimenez. Mr Jimenez was appointed as a member of the Nomination Committee in December 2003. They are all Non-Executive Directors. With the exception of the Chairman and Dr Mogren, for the reasons explained above, the Board considers them all to be independent.

The remit of the Nomination Committee is, primarily, to lead the process for and to make proposals to the Board for any new appointments as Directors of the Company. The remit of the Nomination Committee is available on the Company’s website: astrazeneca.com. During 2003, the Nomination Committee held regular meetings. Each meeting was attended by all of its members. In particular, it considered the appointment to the Board of two additional Non-Executive Directors. External search consultants assisted with this work. The Nomination Committee unanimously recommended to the Board that Michele Hooper and Joe Jimenez be appointed as Non-Executive Directors.

As with all new Non-Executive Directors, a series of induction meetings with various senior managers were arranged for Ms Hooper and Mr Jimenez following their appointments to the Board.

Science Committee
In July 2003, the Board established a Science Committee. The members of the Science Committee are Jane Henney, Erna Möller and Dame Bridget Ogilvie.

The remit of the Science Committee is, on behalf of the Board, to review and assess the international competitiveness and quality of science within the Company. The Executive Vice-President, Discovery Research and the Chief Scientist and Head

of Project Evaluation normally attend meetings of the Science Committee.

Shareholders
In its financial reporting to shareholders and other interested parties by means of annual and quarterly reports, the Board aims to present a balanced and understandable assessment of the Company’s financial position and prospects.

The Company maintains a corporate website containing a wide range of information of interest to institutional and private investors: astrazeneca.com.

The Company has frequent discussions with institutional shareholders on a range of issues affecting its performance. These include meetings following the announcement of the annual results with the Company’s largest institutional shareholders on an individual basis. In addition, the Company responds to individual ad hoc requests for discussions from institutional shareholders. The senior Non-Executive Director is available to shareholders if they have concerns which contact through the normal channels of Chairman, Chief Executive or Chief Financial Officer has failed to resolve or for which such contact is inappropriate.

All shareholders, including private investors, have an opportunity to put questions to members of the Board on matters relating to the Company’s operation and performance at the AGM.

Employees
The core values of the Company are respect for the individual and diversity; openness, honesty, trust and support for each other; integrity and high ethical standards; and leadership by example at all levels.

The Company maintains an open management style and involves its employees both in daily decisions which affect them and longer term matters. The Company is fully committed to keeping all of its employees informed about their work unit and the wider business, as well as discussing the implications of major business changes and other relevant matters. Key business priorities are communicated throughout the organisation and form part of the basis for the Company’s employee bonus and incentive plans. Details of employees’ share plans appear in Note 30 to the Financial Statements.

In line with legal requirements and cultural standards, more formal national and business level employee consultation arrangements exist in some countries, including the UK. There is a forum for employee consultation at European level, chaired by the Chief Executive, in which employee representatives from 19 countries participate. The Company also has a variety of constructive relationships with trade unions across its worldwide operations including formal recognition and active dialogue where appropriate.

The Company believes that every employee should be treated with the same respect and dignity. It values the rich diversity and creative potential of people with differing backgrounds and abilities and encourages a culture of equal opportunities in which personal success depends on personal merit and performance. It is Company policy that there should be no discrimination against any person for any reason. All judgements about people for the purposes of recruitment, development and promotion are made solely on the basis of their ability and potential in relation to the needs of the job. Every manager is responsible for implementing this policy.

It is Company policy that people with disabilities should have the same consideration as others with respect to recruitment, retention and personal development. Depending on their skills and abilities, people with disabilities enjoy the same career prospects as other employees and the same scope for realising potential. The Company also takes all reasonable steps to ensure that its working environments can accommodate special needs.

Other stakeholders
The Company aims to set, promote and maintain high standards of corporate responsibility wherever it operates. Dame Bridget Ogilvie, Non-Executive Director, is the Board member responsible for this area and oversees the work of a cross-functional committee. The Company has established systems to monitor its performance. Policies and standards relating to corporate responsibility are maintained and widely communicated within the organisation. In 2003, the Company was again included in the FTSE4Good and the Dow Jones Sustainability Indexes. The Company publishes and sends to shareholders a separate Corporate Responsibility



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48  
AstraZeneca Annual Report and
Form 20-F Information 2003
  Audit Committee’ s Report





         
        Audit Committee’s
Directors’ Report continued       Report





         

Summary Report. More detailed information about the Company’s approach to this area of its business can be found on its website: astrazeneca.com.

It is not Company policy formally to comply with the Confederation of British Industry’s code of practice on the prompt payment of suppliers. It is, however, Company policy to agree appropriate payment terms with all suppliers when agreeing the terms of each transaction, to ensure that those suppliers are made aware of the terms of payment and, subject to their compliance, abide by the terms of payment. The total amount of money owed by the Company’s subsidiaries to trade creditors at the balance sheet date was equivalent to 75 days’ average purchases. No equivalent disclosure is provided in respect of the Company as it has no external creditors.

Purchase of own shares
The Company’s stated distribution policy contains both a regular dividend cash flow and a share re-purchase component to give the Company more flexibility in managing its capital structure over time. In August 1999, the Company announced a $2 billion share re-purchase programme to be completed by the end of 2002. This programme was completed ahead of schedule in the second quarter of 2002. In January 2002, the Company announced an additional $2 billion re-purchase programme which was completed on schedule by the end of 2003.

During 2003, the Company purchased 27.2 million of its own Ordinary Shares with a nominal value of $0.25 each for an aggregate cost of $1,154 million. Following the purchase of these shares, they were all cancelled as required by applicable English law. This number of shares represents 1.6% of the Company’s total issued share capital at 31 December 2003.

Since the beginning of the re-purchase programme in 1999, the Company has purchased for cancellation in total 92.8 million of its own Ordinary Shares with a nominal value of $0.25 each for an aggregate cost of $3,959 million. This number of shares represents 5.5% of the Company’s total issued share capital at 31 December 2003.

The Company continues to maintain robust controls in respect of all aspects of the share re-purchase programme to ensure

compliance with English law and the Listing Rules of the UK Listing Authority. In particular, the Company’s Disclosure Committee meets to ensure that the Company does not purchase its own shares during prohibited periods. At the AGM on 29 April 2004, the Company will seek a renewal of its current permission from shareholders to purchase its own shares.

Political donations
Under the UK’s Political Parties, Elections and Referendums Act 2000, shareholder authority is required for political donations to be made or political expenditure to be incurred by the Company or its subsidiaries in the European Union. Neither the Company nor its subsidiaries made any donations or incurred any expenditure in 2003 in the European Union in respect of which shareholder authority or disclosure in this Directors’ Report is required under the Act. Neither the Company nor its subsidiaries intend to make any such donations or incur any such expenditure in the European Union in the foreseeable future. However, the Act defines ‘political organisation’ widely and, for example, interest groups or lobbying organisations concerned with the review of government policy or law reform may be caught by the definition.

To enable the Company to continue to support such organisations without inadvertently breaching the Act, a resolution will, in the same way as last year, be proposed at the AGM on 29 April 2004 authorising the Company to make donations or incur expenditure in the European Union up to an aggregate limit of $150,000.

In 2003, AstraZeneca’s US legal entities made contributions amounting in aggregate to $258,000 (2002 $275,000) to state political party committees and to campaign committees of various state candidates affiliated with the major parties. All contributions were made only where allowed by state law. American nationals exercised decision-making over the contributions and the funds were not provided or reimbursed by any non-US corporation.

On behalf of the Board
G H R Musker

Group Secretary and Solicitor
29 January 2004

The members of the Audit Committee are Karl von der Heyden (Chairman of the Committee), John Buchanan, Jane Henney, Dame Bridget Ogilvie and Marcus Wallenberg. They are all Non-Executive Directors. With the exception of Mr Wallenberg for the reasons explained above, the Board considers them all to be independent under the UK’s revised Combined Code.

The Board remains satisfied that various members of the Audit Committee have recent and relevant financial experience. At its meeting in December 2003, the Board determined that Mr von der Heyden and Dr Buchanan are audit committee financial experts for the purposes of the US Sarbanes-Oxley Act of 2002.

During the year, the remit of the Audit Committee was reviewed and revised. The amended version was approved by the Board in December 2003. The revisions did not introduce fundamental changes to the remit but rather clarified and set out more fully the existing responsibilities of the Audit Committee. The new core remit of the Audit Committee is to review and report to the Board on:

>   the scope of and plans for audits of the Company by the external auditor and the internal audit function;
   
>   the implementation of the external and internal audit plans and the handling of any material issues arising from those audits;
   
>   the Company’s overall framework for internal control over financial reporting and its financial reporting processes;
   
>   the Company’s overall framework for other internal controls;
   
>   the Company’s overall framework for risk management with particular emphasis on financial risks;
   
>   the accounting policies and practices of the Company; and
   
>   the annual and quarterly financial reporting carried out by the Company.


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Audit Committee’s Report 49




       
       
       




       

The Audit Committee is also charged with promptly bringing to the attention of the Board:

> any significant concerns of the external auditor about the conduct, results or overall outcome of the annual audit of the Company;
   
> any significant concerns of the Chief Internal Auditor about the conduct, results or outcome of internal audits;
   
> any matters which may significantly affect or impair the independence of the external auditor;
   
> any significant deficiencies or material weaknesses in the design or operation of the Company’s internal control over financial reporting;
   
> any significant deficiencies or material weaknesses in the design or operation of the Company’s other internal controls and any significant breaches of those internal controls; and
   
> any serious issues of non-compliance.

The Audit Committee also oversees the establishment, implementation and maintenance of the Code of Conduct and establishes procedures for the receipt and handling of complaints concerning accounting or audit matters; appoints and agrees the compensation for the external auditor subject, in each case, to the approval of the Company’s shareholders in general meeting and, if necessary, recommends to the Board that a resolution be proposed at a general meeting of the Company authorising the removal of the external auditor; and reviews and approves the appointment and any dismissal of the Chief Internal Auditor.

The full revised remit of the Audit Committee is available on the Company’s website: astrazeneca.com.

As a result of a significantly increased workload, due mainly to the implementation of the US Sarbanes-Oxley Act of 2002, the Audit Committee met seven times in 2003 compared to four meetings in 2002. It is currently scheduled to meet seven times in 2004. Each meeting of the Audit Committee in 2003 was attended by all five of its members except that Dr Buchanan was unable to attend the January meetings due

to prior engagements. At the invitation of the Audit Committee, the Chairman of the Board, a Non-Executive Director, attended all of its meetings in 2003.
During the year, in line with its normal practice, the Audit Committee also held a number of private meetings, without management present, with both the Company’s Chief Internal Auditor and the lead partner from the Company’s external audit firm. The purpose of these meetings was to facilitate free and open discussions between the Audit Committee members and the Chief Internal Auditor and the external lead audit partner, independent of the main sessions of the Audit Committee attended by the Chief Financial Officer and the Group Financial Controller.

During 2003, the business considered and discussed by the Audit Committee included:

> the financial disclosures contained in the Company’s annual and quarterly reports to shareholders and other interested parties;
   
> various accounting matters, including the Company’s critical accounting policies, raised by management and the external auditor in the context of the financial disclosures;
   
> reports from management on the Company’s risk profile and the assessment and management of risk;
   
> reports from management, the internal audit function and the external auditor on the effectiveness of the Company’s system of internal controls and, in particular, internal financial controls; these included a review and discussion of the results of the Company’s ‘letter of assurance’ process for 2003 and reviews of quarterly activity reports from the internal audit function and the status of follow-up actions with management;
   
> the review of and revisions to the AstraZeneca Code of Conduct (described in more detail in the Directors’ Report); the Audit Committee took a particular interest in the updated procedures for raising integrity concerns and the confidential helpline for employees worldwide; in July 2003, the Audit Committee approved procedures for the handling of complaints received by the Company
  regarding accounting, internal accounting controls or auditing matters and for the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters;
   
> a review of the Company’s US sales and marketing compliance programme, including the five year Corporate Integrity Agreement between the Company and the Office of Inspector General for the US Department of Health and Human Services signed in 2003;
   
> proposals from the internal audit function and the external auditor about their audit programmes for 2003;
   
> a review at the beginning of 2003 of the performance of the external auditor which resulted in the Audit Committee unanimously recommending that a resolution for the re-appointment of KPMG Audit Plc as the Company’s external auditor be proposed to shareholders at the AGM in April 2003;
   
> the succession plans for the rotation of the global lead audit partner of the external auditor; in July 2003, the Audit Committee met and had discussions with a number of succession candidates proposed by the external auditor; the new lead audit partner selected following those discussions meets with the full approval of the Audit Committee and will succeed the current lead audit partner in April 2004;
   
> a report from the Company’s Treasury function about its operations and approach to risk management;
   
> the pre-approval of all audit services and permitted non-audit services undertaken by the external auditor; in April 2003, the Audit Committee approved certain pre-approval policies and procedures for three categories of work – audit services, audit-related services and tax services – and a standing agenda item at Audit Committee meetings now covers the operation of these procedures;
   
> the amount of audit and non-audit fees of the external auditor; the Audit Committee was satisfied throughout the year that the objectivity and


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50 AstraZeneca Annual Report and
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Directors’ Remuneration Report  




       
       
  Directors Remuneration Report  




       
  independence of the external auditor were not in any way impaired by either the nature of the non-audit work undertaken by the external auditor during the year, the level of non-audit fees charged for such work or any other facts or circumstances; full details of the audit and non-audit fees for the year are disclosed in Note 33 to the Financial Statements; and
   
> the impact of the US Sarbanes-Oxley Act of 2002 on the Company and, in particular, on the operation of the Audit Committee and its relationship with the external auditor; this included periodic reviews of the Company’s state of compliance with applicable provisions of the Act.

At the scheduled meeting of the Audit Committee held at the end of January 2004, the Chief Executive and the Chief Financial Officer presented to Audit Committee members their conclusions following the evaluation of the effectiveness of the Company’s disclosure controls and procedures required by Item 15(a) of Form 20-F. Based on their evaluation, the Chief Executive and the Chief Financial Officer concluded that the Company maintains an effective system of disclosure controls and procedures.

There was no change in the Company’s internal control over financial reporting that occurred during the period covered by this Annual Report and Form 20-F Information that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

On behalf of the Audit Committee K M von der Heyden Non-Executive Director and Chairman of the Audit Committee 29 January 2004

At the Annual General Meeting on 29 April 2004, a resolution will be proposed to approve the Directors’ Remuneration Report.

Remuneration Committee
The members of the Remuneration Committee are Sir Peter Bonfield (Chairman of the Committee), John Buchanan and Erna Möller. They are all Non-Executive Directors. The Board considers them all to be independent.

The remit of the Remuneration Committee is, primarily, to recommend for decision by the Board the fundamental remuneration policy for the Company and to ensure the proper operation of all plans for employees involving the Company’s shares. More particularly, it makes specific proposals in respect of the remuneration packages of individual Executive Directors and the Company’s most senior executives. A copy of the Remuneration Committee’s remit is available on the Company’s website: astrazeneca.com.

The Remuneration Committee met four times during 2003. Each meeting was attended by all three of its members. At the invitation of the Remuneration Committee, the Chairman of the Board, a Non-Executive Director, attended all of its meetings in 2003. At the request of the Remuneration Committee, Sir Tom McKillop, Chief Executive and Peter Brown, Vice-President, Global Compensation and Benefits, as well as the Secretary of the Remuneration Committee, Graeme Musker, attended all of its meetings and provided advice and services which materially assisted the Remuneration Committee during 2003. In doing so, Mr Brown drew on various sources of data concerning directors’ and executives’ salaries, bonus levels and other incentives including general pharmaceutical industry reports and surveys, as well as surveys specifically carried out for the Company. These included certain surveys prepared for the Company by Towers Perrin. During 2003, Towers Perrin also provided global share plan administration services to the Company and consultancy services to the Company’s US business.

Overall remuneration policy and purpose
The Company is committed to maintaining a dynamic performance culture in which every employee champions the growth of

shareholder value, is clear about the Company’s objectives, knows how their work impacts on those objectives and that they will benefit from achieving high levels of performance.

The Board has confirmed that the Company’s overall remuneration policy and purpose is:

> to attract and retain people of the quality necessary to sustain the Company as one of the best pharmaceutical companies in the world; and
> to motivate them to achieve the level of performance necessary to create sustained growth in shareholder value.

In order to achieve this, remuneration policy and practice is designed:

> to closely align individual and team reward with business performance at each level;
> to encourage employees to perform to their fullest capacity;
> to encourage employees to align their interests with those of shareholders;
> to support managers’ responsibility to achieve business performance through people and for them to recognise superior performance, in the short and longer term;
> to be as locally focused and flexible as is practicable and beneficial;
> to be competitive and cost-effective in each of the relevant employment markets; and
> to be as internally consistent as is practicable and beneficial taking due account of market need.

The cost and value of the components of the remuneration package are considered as a whole and are designed:

> to ensure a proper balance of fixed and variable performance-related components, linked to short and longer term objectives; and
> to reflect market competitiveness taking account of the total value of all of the benefit components.

The principal components contained in the total remuneration package, for employees as a whole, are:

> annual salary – based on conditions in the relevant geographic market, with the provision to recognise, in addition, the


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  AstraZeneca Annual Report and
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Directors’ Remuneration Report 51

 
 
 

 
value of individuals’ sustained personal performance, resulting from their ability and experience;
>   annual bonus – a lump sum payment related to the targeted achievement of corporate, functional and individual goals, measured over a year within a specific plan; the corporate goals are derived from the annual budget set by the Board and take into account external expectations of performance; the functional goals are agreed by the Remuneration Committee at the start of, and are monitored throughout, the year;
>   longer term incentive – for selected groups, a longer term incentive targeted at the achievement of strategic objectives with close alignment to the interests of shareholders;
>   pension arrangements which are appropriate to the relevant market;
>   other benefits such as holidays and sickness benefit which are cost-effective and compatible with the relevant national welfare arrangements; and
>   share participation – various plans provide the opportunity for employees to take a personal stake in the Company’s wealth as shareholders.

The way in which these elements are combined and applied varies depending, for example, on market need and practice in various countries.

For each Executive Director, the individual components are:

> annual salary – the actual salary for each of the Executive Directors is determined by the Remuneration Committee on behalf of the Board; these salaries reflect the experience and sustained performance of the individuals to whom they apply, as judged annually by the Remuneration Committee, taking account also of market competitiveness;
   
>   short term bonus:
     
  >   the Chief Executive is eligible for an annual bonus related solely to the achievement of the targeted performance of earnings per share; the bonus payable is on a scale of 0-100% of salary and 50% of salary is payable for the achievement of target performance; as referred to
above, this is derived from the budget set by the Board and takes into account external expectations of performance;
   
>   the Deputy Chairman was also eligible for this annual bonus related solely to earnings per share for that part of 2003 during which he served as an Executive Director (1 January 2003 until 31 August 2003);
   
>   the Chief Financial Officer is eligible for an annual bonus related to the achievement of both the targeted performance of earnings per share and the achievement of performance measures relevant to his particular area of responsibility; the bonus payable is on a scale of 0-100% of salary and 50% of salary is payable for the achievement of target business performance; 80% of the bonus relates to the achievement of the earnings per share target and 20% to the other performance measures;
   
>   longer term incentive – Executive Directors are also rewarded for improvement in the share price performance of the Company over a period of years by the grant of share options; the grant of options under the AstraZeneca Share Option Plan is determined by the Remuneration Committee, as are the performance targets that will apply and whether they will apply to the grant and/or exercise of options – this is described in more detail below; and
   
>   pension arrangements – the table on page 56 gives details of the changes in the value of the Executive Directors’ accrued pensions during 2003:
     
  >   UK Executive Directors’ pension arrangements – the Chief Executive is a member of the Company’s main UK defined benefit pension plan; the normal pension age under this plan is 62; however, a member’s accrued pension is available from age 60 without any actuarial reduction; in addition the accrued pension is available, unreduced, from age 57 if the Company consents to a request for early retirement and from age 50 if the retirement is at the Company’s request;

On death in retirement, the accrued pension is guaranteed payable for the first five years of retirement and then reduces to two-thirds of this amount should there be a surviving spouse or other dependent; any member may choose higher or lower levels of survivor’s pensions at retirement, subject to Inland Revenue limits, in return for an adjustment to their own pension of equivalent actuarial value; pensions are also payable to dependent children; in the event of a senior employee becoming incapacitated from performing his work then a pension is payable immediately as if such person had reached normal retirement age (subject to a maximum of 10 years additional service), based on current pensionable salary; in the event of death prior to retirement, dependents are entitled to a pension of two-thirds of the pension that would have been earned had such person remained in service to age 62 plus a capital sum of four times pensionable pay; pensions in payment are increased annually in line with inflation, as measured by the UK Retail Prices Index, up to a maximum of 5%;

In respect of UK Executive Directors whose pensionable earnings are capped by the earnings limit imposed by the Finance Act 1989, unapproved defined contribution schemes are made available; currently, only the Chief Financial Officer is affected by this limit; the Company has agreed to pay annually 50% of base salary in excess of the statutory earnings cap for the pension and associated tax liability, with the intention of providing equivalence of benefits with non-capped UK Executive Directors; if this does not provide equivalence, the Company has agreed to make up the difference; the benefits derived from equivalence are shown in the table on page 56 as if the scheme was a defined benefit arrangement; the Company contribution in 2003 in respect of the pension element was $193,000;



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52 AstraZeneca Annual Report and
Form 20-F Information 2003
Directors’ Remuneration Report  

 
 
Directors Remuneration Report continued

 
>   Swedish Executive Directors’ pension arrangements – normally, Swedish Executive Directors participate in the collectively bargained ITP pension plan, which provides pensions, dependents’ pensions and lump sums on death in service; in respect of those Swedish Directors or former Directors, namely Håkan Mogren and Åke Stavling, whose pensionable earnings are or were in excess of the earnings limit imposed by the Swedish Communal Tax Law (Kommunalskattelagen), supplementary pension commitments are made; the Company has agreed to pay 70% of pensionable salary from age 60 to age 65 and 50% of such earnings from age 65; the ITP provisions are included in this additional commitment; paid in pension capital may also be used in the event of retirement or termination before the age of 60; in the event of long term illness then a pension is payable immediately as if such person had reached the normal retirement age, of 70% of current pensionable salary; on death in retirement the accrued pension is payable to a surviving spouse or other dependent; in the event of death prior to retirement the accrued pension is payable to a surviving spouse or other dependent plus a capital sum of three times pensionable salary less $100,000 if married or two times pensionable salary less $100,000 if not.

Other customary benefits (such as a car and health benefits) are also made available. This happens by way of the Executive Directors’ participation in the Company’ s flexible benefits arrangements, which apply to the vast majority of the Company’ s UK and Swedish employees.

Measurement of performance
Each year, as referred to above both short term and longer term objectives are agreed with the Board and regularly monitored in respect of both individual business functions and integrated corporate strategy. Performance against these objectives determines functional bonuses and, separately, whether or not share options will be granted.

In respect of bonuses in 2003, relevant factors considered included the delivery of higher earnings per share than had been anticipated both by the Board and externally at the start of the year, the sales performance of newer products, new product approvals and emerging benefits from ‘efficiency and effectiveness’ projects. Going forward, the corporate goals will reflect the Company’s statement that financial performance over the next several years is likely to rank among the best in the global peer group of large capitalisation pharmaceutical companies.

AstraZeneca Share Option Plan
The AstraZeneca Share Option Plan was approved at the AGM in 2000 following prior consultation with major shareholders. Its design took account of the overall competitiveness of the Company’s remuneration arrangements for senior executives and US employees in the context of the Company’s peers in the pharmaceutical industry.

The Remuneration Committee must on every occasion, before agreeing the grant of options to Executive Directors and others, be satisfied that the most recent and also the underlying performance of the Company justifies the grant; in addition it must be satisfied that the necessary performance has been achieved by each individual.

In agreeing grants of options in 2003, the Remuneration Committee took into account, in particular, very successful progress in the previous year in the transformation of the Company’s product portfolio in view of the potential reduction in sales resulting from the loss of patent protection for key products. Against a background of increased regulatory demands and costs, the Company had set clear strategic targets to be achieved in the reference period: to increase sales of new and growth products; to extend the application of existing products; to launch new products and to achieve key milestones in making further new products ready for launch. These targets were achieved. For example: Nexium, launched in 2001, achieved sales of close to $2 billion in 2002 and Seroquel reached sales of over $1 billion for the first time; new indications or formulations for Arimidex, Casodex and Zomig were launched in 2002; Iressa and Faslodex were launched and key milestones were passed in respect of Crestor and Exanta.

The dilutive effect of the proposed grants of options on the Company’s issued share capital was also considered by the Remuneration Committee, particularly in the light of the letter sent to shareholders in 2000 by the then Chairman of the Remuneration Committee ahead of the approval of the plan at the AGM in which it was stated that the percentage of the issued share capital which could be allocated under all of the Company’s employee share plans over a period of ten years should be under 10%; this commitment is applied by the Remuneration Committee in practice as a limit, on average, of under 1% per annum.

The Remuneration Committee concluded that a grant of options to those plan participants and individual Executive Directors proposed for a grant was appropriate given the level of performance achieved.

Since the Company’s AGM in 2003, a number of the Company’s larger shareholders (particularly those who expressed concern in respect of the Directors’ Remuneration Report for 2002) have been consulted about the Company’s remuneration arrangements for its Executive Directors and senior employees, including the Company’s use of employee share plans. While there are no apparent concerns on the overall levels of remuneration, concern has been expressed about the fact that the AstraZeneca Share Option Plan currently involves the consideration of performance criteria on grant, as described above, rather than the fulfilment of performance conditions before options can be exercised. The dialogue with shareholders will continue. In particular, in accordance with the arrangements agreed with shareholders in 2000, the Remuneration Committee intends to review the AstraZeneca Share Option Plan during 2004.

A graph is set out on page 57 illustrating the Company’s total shareholder return (TSR) over the last five years against the FTSE 100 Index. Although the Company does not use TSR as a formal measure of performance for its share plans, it is an important measure used in the Company’s overall business performance assessment process.



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  AstraZeneca Annual Report and
Form 20-F Information 2003
Directors’ Remuneration Report
53




       
       
       




       

Executive Directors’ service contracts
The service contracts of the current Executive Directors provide for a notice period of one year. For new Executive Directors, the Board would aim to negotiate a one year notice period. In exceptional circumstances, the initial notice period may be for longer than one year. In those circumstances, the Board would explain to shareholders the reasons why it believed a longer notice period was necessary and it would be the Board
’s intention that it should be reduced to one year subsequently. At the time of the AGM on 29 April 2004, the unexpired term of Executive Directors’ service contracts will be a maximum of one year. The details of the Executive Directors’ individual service contracts are set out in the table below.

In the event of the termination of an Executive Director’s service contract, depending upon the circumstances the Company may be liable to provide compensation to the Executive Director equivalent to the benefits which he or she would have received during the contractual notice period. For current Executive Directors, it is the Company’s expectation that any such liability would be calculated on the basis of one year’s base salary, target bonus and other benefits. The Company’s policy in the event of the termination of an Executive Director’s service contract is to avoid any liability to the Executive Director in excess of his or her contractual entitlement and aim to ensure that any liability is mitigated to the fullest extent possible.

Leaving arrangements for Åke Stavling
Å
ke Stavling, Executive Director, left the Company at the end of January 2003. Mr Stavling’s leaving arrangements were considered and approved by the Remuneration Committee, based on existing contracts and practice. These are summarised below.

>   As disclosed in the Directors’ Remuneration Report for 2002, Mr Stavling is receiving compensation from
  the Company which is being paid on a monthly basis from his leaving date until the end of January 2005; the amount of this compensation is equivalent to two years’ base annual salary; Mr Stavling was entitled to a notice period of two years under his service contract at the time he left the Company.
   
>   All other allowances, bonuses and benefits ceased on Mr Stavling leaving the Company at the end of January 2003.
   
>   On leaving the Company, options held by Mr Stavling over 80,516 Ordinary Shares in the Company vested and became exercisable; these options had been granted to him since April 1999 at various prices in the normal course of operation of the Zeneca 1994 Executive Share Option Scheme and the AstraZeneca Share Option Plan; if not exercised, they will lapse on 31 January 2005.
   
>   In May 2003, there were released to Mr Stavling from retention 7,624 Ordinary Shares in the Company which he was awarded in 2000 under the Zeneca Executive Performance Bonus Scheme in respect of his bonus for 1999.
   
>   In November 2003, there were released to Mr Stavling 533 Ordinary Shares in the Company which were allocated to him in November 2000 on the demerger of Zeneca Agrochemicals in respect of executive share options he held on 10 November 2000.
   
>   Share options held by Mr Stavling under the Astra Shareholder Value Incentive Plan were not affected by his leaving the Company and details are disclosed on page 59 in the normal way.
   
>   From age 60, the pension arrangements previously disclosed by the Company in respect of Mr Stavling will apply.

Arrangements for Håkan Mogren ceasing to be an Executive Director
From April 1999, H
åkan Mogren was Executive Deputy Chairman of the Company. At the end of August 2003, he ceased to be an Executive Director and employee of the Company and became Non-Executive Deputy Chairman. As a result, certain arrangements concerning Dr Mogren’s remuneration were considered and approved by the Remuneration Committee, based on existing contracts and practice. These are summarised below.

>   From 1 January 2003 until 31 August 2003, Dr Mogren received the emoluments to which he was entitled as Executive Deputy Chairman, the details of which are disclosed on pages 55 and 56 in the normal way; these included an annual bonus which was calculated pro rata for the period of his employment by the Company in 2003.
   
>   Following his change in status to Non-Executive Deputy Chairman at the end of August 2003, Dr Mogren is receiving compensation from the Company which is being paid on a monthly basis from 1 September 2003 until the end of August 2004; the amount of this compensation is equivalent to one year’s base annual salary which is derived from his service contract.
   
>   All allowances, bonuses and benefits ended on Dr Mogren ceasing to be an Executive Director and employee of the Company at the end of August 2003 with the exception of his existing health insurance cover and life insurance arrangements which will continue until age 60.
   
>   Although Dr Mogren ceased to be an employee of the Company on 31 August 2003, he has continued as a Director of the Company and consequently, under the relevant plan rules, options over Ordinary Shares previously granted to him at various

 

Details of Executive Directors’ service contracts              
               
Executive Director   Date of service contract    Unexpired term at
31 December 2003
  Notice period   
         







 
Sir Tom McKillop   11.01.96   One year   One year  







 
Jonathan Symonds   20.05.98   One year   One year  







 

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54 AstraZeneca Annual Report and
Form 20-F Information 2003
Directors’ Remuneration Report




       
       
Directors Remuneration Report continued




       
prices in the normal course of operation of the Astra Shareholder Value Incentive Plan, the Zeneca 1994 Executive Share Option Scheme and the AstraZeneca Share Option Plan were not affected by his change of status to Non-Executive Deputy Chairman.
   
>   The same applies to both the Ordinary Shares in the Company which he was awarded in 2000 under the Zeneca Executive Performance Bonus Scheme in respect of his bonus for 1999 and the Ordinary Shares in the Company which were allocated to him in November 2000 on the demerger of Zeneca Agrochemicals in respect of executive share options he held on 10 November 2000. These Ordinary Shares were released to him in May and November 2003 respectively. More details about share options and the releases of shares are disclosed on pages 57 to 59.

As a Non-Executive Director, Dr Mogren will not be entitled to any future performance related bonuses, grants of share options or pension contributions. From age 60, subject to his re-election as a Director at AGMs, Dr Mogren’s fee as Non-Executive Deputy Chairman will be £100,000 per annum. From age 60, the pension arrangements previously disclosed by the Company in respect of Dr Mogren will apply.

During 2003, Dr Mogren purchased certain furnishings from the Company on arm’s length terms. The total value of the transaction concerned was SEK618,000. The value of the items purchased was assessed by independent valuers.

Position of the Non-Executive Directors
None of the Non-Executive Directors has a service contract. They are not eligible for performance-related bonuses or the grant of share options. No pension contributions are made on their behalf.

External appointments and retention of fees
With the specific approval of the Board in each case, Executive Directors may accept external appointments as non-executive directors of other companies and retain any related fees paid to them.

Sir Tom McKillop, Chief Executive, served as a Non-Executive Director of Lloyds TSB Group plc throughout 2003 and retained the fees paid to him for this service. In 2003,

the total amount of such fees paid to him was £49,000.

Jonathan Symonds, Chief Financial Officer, served as a Non-Executive Director of QinetiQ Group plc throughout 2003 and retained the fees paid to him for this service. In 2003, the total amount of such fees paid to him was £33,000. With effect from 1 September 2003, Mr Symonds also receives and retains fees of £15,000 per annum for his position as a member of the UK Accounting Standards Board.

Directors’ emoluments in 2003
The Directors’ emoluments in 2003 are disclosed on pages 55 to 56.

Directors’ interests in shares
Details of the Directors’ interests in the Company’s Ordinary Shares are disclosed on pages 57 to 59.

Audit
The Directors’ emoluments in 2003 and the details of the Directors’ interests in the Company’s Ordinary Shares disclosed on pages 55 to 59 have been audited by the Company’s external auditor.



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AstraZeneca Annual Report and
Form 20-F Information 2003
Directors’ Remuneration Report
55




       
       
       




Directors’ emoluments in 2003
The aggregate remuneration, excluding pension contributions, paid to or accrued for all Directors and officers of the Company for services in all capacities during the year ended 31 December 2003 was £11 million ($18 million) (including £250,000 ($403,000) to the Chairman). Remuneration of individual Directors is set out below in sterling and US dollars. Among those Directors who receive their remuneration in sterling are the Chairman, the Non-Executive Deputy Chairman, the senior Non-Executive Director, the Chief Executive and the Chief Financial Officer.

Sterling
Salary
and fees
£’000
 
Bonuses
£’000
 
Taxable
benefits
£’000
 
Other
£’000
 
Total
2003
£’000
 
Total
2002
£’000
 
Total
2001
£’000
   














 
Percy Barnevik 250         250   250   250  














 
Håkan Mogren 461   450   51 284 ø 1,246   1,347   1,104  














 
Sir Tom McKillop 885   860   1   44 * 1,790   1,479   1,304  














 
Jonathan Symonds 534   451   6   80 1,071   909   815  














 
Sir Peter Bonfield 74         74   46   38  














 
John Buchanan 53         53   33 **  














 
Jane Henney 49         49   60   9 **














 
Karl von der Heyden 55         55   47   41  














 
Michele Hooper 19 **       19      














 
Joe Jimenez 19 **       19      














 
Erna Möller 49         49   62   55  














 
Dame Bridget Ogilvie 49         49   62   55  














 
Marcus Wallenberg 46         46   42   38  














 
Former Directors                            
Åke Stavling 81 +   6 402 ø 489   835   712