Astrazeneca Regulatory News (AZN)

AstraZeneca PLC

8 November 2018 07:00 GMT

Year-to-Date and Q3 2018 Results

AstraZeneca Returns to Sales Growth; New Medicines and Emerging Markets Lead the Way

Product Sales increased by 4% in the year to date (2% at CER1), supporting full-year guidance. For the quarter, Product Sales increased by 8% (9% at CER), driven by the strong performance of new medicines2 (+85%, +86% at CER) and the sustained strength of Emerging Markets (+12%, +16% at CER). Oncology sales increased by 56% in the quarter (57% at CER); China and US sales increased by 32% and 25%, respectively. The pipeline, designed to deliver sustainable growth and advances in treatment for patients, produced further positive news flow in the period; regular, additional news will continue. The Company is on track to deliver its FY 2018 Product Sales and Core EPS guidance.

Pascal Soriot, Chief Executive Officer, commenting on the results said:

"Today marks an important day for the future of AstraZeneca, with the performance in the quarter and year to date showing what we expect will be the start of a period of sustained growth for years to come. Commercial execution has been exceptional and our new medicines are now firmly established as the drivers of growth, supporting our continued success in Emerging Markets.

These new medicines are showing great promise, including Tagrisso, Imfinzi, Lynparza in cancer, Farxiga in diabetes and Fasenra in severe asthma. We're also continuing to replenish our early-stage pipeline as we bring our innovative medicines to patients around the world."

Financial Highlights

• Product Sales increased by 4% in the year to date (2% at CER) to $15,281m; new medicines generated additional sales of $1.8bn at CER

• The Reported Gross Margin declined by two percentage points to 78% in the year to date, partly reflecting the favourable impact of manufacturing variances in the first half of 2017 and the dilutive effect of the Lynparza collaboration with MSD5; the Core Gross Margin declined by two percentage points to 80%

• Productivity gains, simplification and the focus on costs continued, with prioritised investment in new medicines and in China delivering strong returns

o Total Reported Operating Expenses were stable in the year to date (down by 2% at CER) to $11,589m. Total Core Operating Expenses increased by 4% (2% at CER) to $10,253m

o Reported R&D costs declined by 7% in the year to date (8% at CER) to $3,920m; Core R&D costs declined by 4% (6% at CER) to $3,800m, driven by efficiency savings and resource optimisation. Reported SG&A costs increased by 4% in the year to date (1% at CER) to $7,431m; Core SG&A costs increased by 10% (7% at CER) to $6,215m, reflecting support for new medicines and growth in China

• Externalisation Revenue declined by 81% in the year to date to $392m, partly driven by the impact of $997m of income in YTD 2017 as part of the aforementioned collaboration with MSD. Reported Other Operating Income & Expense increased by 55% to $1,525m; Core Other Operating Income & Expense increased by 4% in the year to date (3% at CER) to $1,143m, with the difference between the Reported and Core performances reflecting a legal settlement in the first half of the year. The Company anticipates a significant sum of Externalisation Revenue and Other Operating Income & Expense in the final quarter of the year

• Restructuring costs declined to $271m in the year to date (YTD 2017: $645m); capital expenditure also declined to $728m (YTD 2017: $849m). The Company continues to anticipate declines in restructuring costs and capital expenditure over the full year

• Reported EPS of $0.88 in the year to date represented a decline of 34%. The performance reflected a decline in Total Revenue, the Reported Gross Margin and the increase in Reported SG&A costs. Core EPS declined by 37% to $1.88.

Commercial Highlights

• Oncology: sales growth of 47% in the year to date (44% at CER) to $4,261m, including:

- Tagrisso sales of $1,266m, representing growth of 94% (91% at CER), with increased use in the treatment of 2nd-line EGFR6 T790M-mutated7 NSCLC8 patients and the 2018 approvals in the 1st-line EGFR-mutated (EGFRm) setting as a new standard of care (SoC). Tagrisso sales increased by 104% (105% at CER) to $506m in the quarter

- Lynparza sales of $438m, representing growth of 122% (118% at CER), driven by expanded use in the treatment of ovarian cancer and the approval for use in the treatment of breast cancer

- Imfinzi sales of $371m (YTD 2017: $1m), reflecting ongoing launches for the treatment of unresectable, Stage III NSCLC

• New CVRM9: 14% growth in the year to date (12% at CER) to $2,901m, including:

- Brilinta sales of $945m, representing growth of 21% (18% at CER), due to continued market penetration in acute coronary syndrome and high-risk post-myocardial infarction (HR PMI)

- Farxiga sales of $994m, with growth of 34% (32% at CER), including a sales increase of 51% in Emerging

Markets (57% at CER) to $242m

- Bydureon sales of $446m, an increase of 4% (3% at CER), reflecting an encouraging Bydureon BCise device launch in the US earlier in the year. Sales increased by 19% in the quarter to $152m. Bydureon BCise was also approved in the EU in the quarter

• Respiratory: 5% growth in the year to date (2% at CER) to $3,549m, including:

- A Symbicort sales decline of 6% (9% at CER) to $1,925m, as competitive class pressures in the US continued unabated. Emerging Markets sales of Symbicort increased by 13% (12% at CER) to $364m

- Pulmicort sales growth of 11% (7% at CER) to $897m. China sales increased by 24% (17% at CER) to $572m

- Fasenra sales of $172m (Q3 2018: $86m), consolidating its leadership position among novel biologic severe-asthma medicines

• Emerging Markets: the Company's largest region by Product Sales, with growth of 13% in the year to date (12% at CER) to $5,124m, including:

- A China sales increase of 33% (27% at CER) to $2,847m. Oncology sales in China increased by 55% in the year to date (48% at CER) to $646m, partly underpinned by the launch of Tagrisso in China in 2017, which was added to the National Reimbursement Drug List (NRDL) with effect from Q1 2019 for the treatment of 2nd-line EGFRm T790M-mutated NSCLC. In the quarter, overall China sales increased by 32% to $954m

- An ex-China sales decline of 4% (2% at CER) to $2,277m, partly impacted by the impact from the loss of Product Sales through externalisation activities. The quarter saw an ex-China sales decline of 6% to $746m; this, however, represented an improved performance at CER (+1%). Asia-Pacific sales increased by 6% in the quarter to $269m and Russia sales increased by 2% (11% at CER) to $56m

Pipeline Highlights

The table below highlights significant developments in the late-stage pipeline since the prior results announcement:

Guidance

The Company is on track to deliver its FY 2018 guidance. All measures in this section are at CER. Company guidance is on Product Sales and Core EPS only:

Variations in performance between quarters can be expected to continue. The Company is unable to provide guidance and indications on a Reported basis because the Company cannot reliably forecast material elements of the Reported result, including the fair-value adjustments arising on acquisition-related liabilities, intangible-asset impairment charges and legal-settlement provisions. Please refer to the section 'Cautionary Statements Regarding Forward-Looking Statements' at the end of this announcement.

Additional Commentary

Outside of guidance, the Company provides indications at CER for FY 2018 vs. the prior year:

• As part of its long-term growth strategy, the Company remains committed to focusing on appropriate cash-generating and value-accretive externalisation activities that reflect the ongoing productivity of the pipeline. It is also committed to the continued management of its portfolio through divestments and to increasing the focus, over time, on its three main therapy areas

• The sum of Externalisation Revenue and Core Other Operating Income & Expense is anticipated to decline. In the year to date, the Company generated a sum of $1,535m (FY 2017: $4,266m). Additions to this over the remainder of the year are anticipated to include the impact of:

o Transactions recently announced - see the Corporate & Business Development section for details. These transactions are subject to customary closing conditions

o $400m in potential option payments from the Lynparza collaboration with MSD, which, if MSD chooses to exercise the option, would be recorded in Externalisation Revenue in Q4 2018

o A sales-related milestone under the same collaboration of $150m, achieved during October 2018 and to be recorded in Externalisation Revenue in Q4 2018

• Core R&D costs in FY 2018 are now anticipated to decline by a low single-digit percentage. The prior indication was for a stable to low single-digit percentage decline. Productivity savings, simplification and improved development processes are helping to deliver cost reductions. High levels of activity remain unchanged, illustrated by the 63 Phase III projects ongoing as at the end of the quarter (end of Q3 2017: 56)

• Total Core SG&A costs are now expected to increase broadly in line with the rate seen in the year to date, reflecting support for medicine launches, including Imfinzi in Oncology and Fasenra in Respiratory, as well as additional investment in China. The prior indication was for a low to mid single-digit percentage increase. The Company will retain flexibility in its investment approach, watching closely its impact on Product Sales

• AstraZeneca anticipates declines in restructuring costs and capital expenditure

• A Core Tax Rate of 16-20% (FY 2017: 14%)

Currency Impact

Based only on average exchange rates in the nine months to 30 September 2018 and the Company's published currency sensitivities, the Company anticipates a favourable low single-digit percentage impact from currency movements on Product Sales and Core EPS in FY 2018. Details on currency sensitivities are contained within the Operating and Financial Review.

Sustainability

AstraZeneca's sustainability ambition is founded on making science accessible and operating in a way that recognises the interconnection between business growth, the needs of society and the limitations of the planet. The Company's sustainability ambition is reinforced by its purpose and values, which are intrinsic to its business model and ensures that the delivery of its strategy broadens access to medicines, minimises the environmental footprint of medicines and processes and ensures that all business activities are underpinned by the highest levels of ethics and transparency. A full update on the Company's sustainability progress is shown in the Sustainability Update section of this announcement.

Notes

The following notes refer to pages 1-4:

1. Constant exchange rates. These are not generally-accepted accounting principles (GAAP) financial measures because they remove the effects of currency movements from Reported results.

2. Lynparza, Tagrisso, Imfinzi, Calquence, Lumoxiti, Brilinta, Farxiga, Lokelma, Bevespi and Fasenra. These new medicines are pillars in the three main therapy areas and are important platforms for future growth.

3. Reported financial measures are the financial results presented in accordance with International Financial Reporting Standards.

4. Core financial measures. These are non-GAAP financial measures because, unlike Reported performance, they cannot be derived directly from the information in the Group Financial Statements. See the Operating and Financial Review for a definition of Core financial measures and a reconciliation of Core to Reported financial measures.

5. Merck & Co., Inc., Kenilworth, NJ, US, known as MSD outside the US and Canada.

6. Epidermal growth factor receptor.

7. Substitution of threonine (T) with methionine (M) at position 790 of exon 20 mutation.

8. Non-small cell lung cancer.

9. New Cardiovascular, Renal and Metabolism, incorporating Brilinta, Diabetes medicines and Lokelma.

10. Chronic obstructive pulmonary disease.

11. Neurofibromatosis type 1.

12. Cardiovascular outcomes trial.

13. Committee for Medicinal Products for Human Use (CHMP) of the European Medicines Agency (EMA).

The performance shown in this announcement covers the nine-month period to 30 September 2018 (the year to date or YTD 2018) and the three-month period to 30 September 2018 (the quarter, the third quarter or Q3 2018) compared to the nine-month period to 30 September 2017 (YTD 2017) and the three-month period to 30 September 2017 (Q3 2017) respectively, unless stated otherwise. All commentary in the Operating and Financial Review relates to the year to date, unless stated otherwise.

Pipeline - Forthcoming Major News Flow

Innovation is critical to addressing unmet patient needs and is at the heart of the Company's growth strategy. The focus on research and development is designed to yield strong results from the pipeline.

Conference Call

A conference call and webcast for investors and analysts will begin at 12pm UK time today. Details can be accessed via astrazeneca.com.

Reporting Calendar

The Company intends to publish its full-year and fourth-quarter financial results on 14 February 2019.

About AstraZeneca

AstraZeneca is a global, science-led biopharmaceutical company that focuses on the discovery, development and commercialisation of prescription medicines, primarily for the treatment of diseases in three therapy areas - Oncology, CVRM and Respiratory. AstraZeneca operates in over 100 countries and its innovative medicines are used by millions of patients worldwide. For more information, please visit astrazeneca.com and follow us on Twitter @AstraZeneca.

All narrative on growth and results in this section is based on actual exchange rates, unless stated otherwise. Financial figures are in US$ millions ($m). The performance shown in this announcement covers the nine-month period to 30 September 2018 (the year to date or YTD 2018) and the three-month period to 30 September 2018 (the quarter, the third quarter or Q3 2018) compared to the nine-month period to 30 September 2017 (YTD 2017) and the three-month period to 30 September 2017 (Q3 2017) respectively, unless stated otherwise. All commentary in the Operating and Financial Review relates to the year to date, unless stated otherwise.

Core financial measures, EBITDA, Net Debt, Initial Externalisation Revenue and Ongoing Externalisation Revenue are non-GAAP financial measures because they cannot be derived directly from the Group Condensed Consolidated Financial Statements. Management believes that these non-GAAP financial measures, when provided in combination with Reported results, will provide investors and analysts with helpful supplementary information to understand better the financial performance and position of the Company on a comparable basis from period to period. These non-GAAP financial measures are not a substitute for, or superior to, financial measures prepared in accordance with GAAP. Core financial measures are adjusted to exclude certain significant items, such as:

· Amortisation and impairment of intangible assets, including impairment reversals but excluding any charges relating to IT assets

· Charges and provisions related to global restructuring programmes, which includes charges that relate to the impact of global restructuring programmes on capitalised IT assets

· Other specified items, principally comprising acquisition-related costs, which include fair-value adjustments and the imputed finance charge relating to contingent consideration on business combinations, legal settlements and foreign-exchange gains and losses on certain non-structural intra-group loans

Details on the nature of Core financial measures are provided on page 68 of the Annual Report and Form 20-F Information 2017. Reference should be made to the reconciliation of Core to Reported financial information and the Reconciliation of Reported to Core Financial Measures tables included in the Financial Performance section of this announcement.

EBITDA is defined as Reported Profit Before Tax after adding back Net Finance Expense, results from Joint Ventures and Associates and charges for Depreciation, Amortisation and Impairment. Reference should be made to the Reconciliation of Reported Profit Before Tax to EBITDA included in the Financial Performance section of this announcement.

Net Debt is defined as interest-bearing loans and borrowings net of cash and cash equivalents, other investments and net derivative financial instruments. Reference should be made to Note 3 'Net Debt' included in the Notes to the Interim Financial Statements section of this announcement. Ongoing Externalisation Revenue is defined as Externalisation Revenue excluding Initial Externalisation Revenue (which is defined as Externalisation Revenue that is recognised at the date of completion of an agreement or transaction, in respect of upfront consideration). Ongoing Externalisation Revenue comprises, among other items, royalties, milestone revenue and profit-sharing income. Reference should be made to the Breakdown of Externalisation Revenue table in this Operating and Financial Review.

The Company strongly encourages investors and analysts not to rely on any single financial measure, but to review AstraZeneca's financial statements, including the notes thereto and other available Company reports, carefully and in their entirety.

Table 1: Total Revenue

Table 2: Product Sales

Table 3: Top-Ten Medicines

The top-ten medicines in the year to date by sales are shown in the table below:

Table 4: Breakdown of Externalisation Revenue

Ongoing Externalisation Revenue of $280m represented 71% of total Externalisation Revenue in the year to date (YTD 2017: $531m, 26%). The Company anticipates that Ongoing Externalisation Revenue, including the impact of the aforementioned MSD collaboration will grow as a proportion of Externalisation Revenue over time. A breakdown of Externalisation Revenue is shown below:

Table 5: Initial Externalisation Revenue

A breakdown of Initial Externalisation Revenue in the year to date is shown below:

Table 6: Ongoing Externalisation Revenue

A breakdown of Ongoing Externalisation Revenue in the year to date is shown below:

Table 7: Externalised and Divested Medicines

Several AstraZeneca medicines were externalised or divested after 30 September 2017, thus adversely impacting the Product Sales performance:

Table 8: Ongoing Externalisation Revenue Agreements

Examples of transactions that include Ongoing Externalisation Revenue are shown below:

The performance of new and legacy medicines is shown below, with a geographical split shown in Notes 6 & 7.

Table 9: Therapy Area and Medicine Performance

Specialty-care medicines comprise all Oncology medicines and Fasenra. At 29% of Product Sales, specialty-care-medicine sales increased by 53% in the year to date (50% at CER) to $4,433m. In the first nine months of 2017, speciality-care medicines comprised 20% of Product Sales.

Oncology

Product Sales of $4,261m in the year to date; an increase of 47% (44% at CER). Oncology Product Sales represented 28% of total Product Sales, up from 20% in first nine months of 2017.

Lynparza

By the end of the period, Lynparza was approved in over 60 countries for the treatment of ovarian cancer. Launches in the treatment of breast cancer took place in the US and Japan in 2017 and the indication is under regulatory review in Europe.

Product Sales of Lynparza amounted to $438m, an increase of 122% (118% at CER). The strong performance was geographically spread, with ongoing launches in the Established Rest of World (ROW) and Emerging Markets. The ongoing MSD co-promotion efforts also contributed to sales.

US sales increased by 168% in the year to date to $233m; the performance reflected continued growth in the treatment by Lynparza in both ovarian and breast cancer patients. Lynparza remained the leading US medicine in the poly ADP ribose polymerase (PARP)-inhibitor class in the year to date, as measured by total prescription volumes. A reduction in sequential growth in the quarter reflected returns associated with the discontinuation of capsules and switch to tablets.

Sales in Europe increased by 46% in the year to date (37% at CER) to $137m, driven by strong levels of reimbursement and high BRCA-testing rates. The Company also rolled out a number of launches in a broad, 2nd-line, ovarian-cancer indication, regardless of BRCA status. In the first half of the year, the Company announced that the EMA had approved the use of Lynparza tablets (300mg twice daily) for the same patient population.

Japan sales in the year to date of $25m followed the initial launch in April 2018 as a treatment for 2nd-line ovarian cancer. In July 2018, an additional approval was granted as a targeted chemotherapy-sparing treatment for BRCAm, metastatic breast cancer.

Emerging Markets sales of $33m in the year to date reflected the approval by the China National Medical Products Administration (NMPA), resulting in the subsequent launch of Lynparza in China, the first PARP inhibitor to be approved in the country.

Lung Cancer

Tagrisso

By the end of the period, Tagrisso had been approved in c.40 countries including the US, in the EU and in Japan, for the treatment of 1st-line EGFRm NSCLC; a number of additional regulatory reviews are also underway. In the 2nd-line setting, Tagrisso has been approved and launched in over 80 countries, including the US, in Europe, Japan and China for patients with EGFR T790M-mutated NSCLC.

Product Sales of $1,266m in the year to date represented growth of 94% (91% at CER), partly driven by increased testing rates and the aforementioned approvals in the 1st-line setting. Continued growth was also delivered in the 2nd-line indication in other countries. Tagrisso is now AstraZeneca's third-largest selling medicine and best-selling Oncology medicine.

Sales in the US increased by 109% in the year to date to $580m, with sequential growth in the quarter of 23% to $239m, reflecting a rapid uptake in the 1st-line setting that followed the April 2018 approval of Tagrisso as a 1st-line treatment for patients with metastatic, EGFRm NSCLC. The medicine achieved market leadership in new patient starts. During the period, Tagrisso was also assigned Category 1 status as a preferred regimen in the treatment of EGFRm NSCLC within the National Comprehensive Cancer Network (NCCN) guidelines.

Within Emerging Markets, Tagrisso sales increased by 213% in the year to date (206% at CER) to $266m, with notable growth in China, where the medicine was approved in March 2017 as a 2nd-line treatment for patients with EGFR T790M-mutated NSCLC. The Asia-Pacific region has a relatively high prevalence of lung-cancer patients with an EGFR mutation, namely c.30-40% of the total, contrasting with c.10-15% in the Western hemisphere. During the period, it was announced that Tagrisso will enter the NRDL from Q1 2019 for the treatment of 2nd-line, EGFRm NSCLC patients with the T790M mutation.

In Europe, sales of $222m in the year to date represented growth of 79% (68% at CER), driven by further growth in testing rates, positive reimbursement decisions and strong levels of demand. Sales in Europe increased sequentially from Q2 2018 to Q3 2018 by 19% (23% at CER) to $83m, as the medicine reached more patients in each country and the benefit was felt from the EU regulatory approval in June 2018 for the 1st-line treatment of patients with EGFRm NSCLC. Tagrisso was subsequently launched in a number of countries in this setting, including in France and Germany; reimbursement negotiations are underway elsewhere.

Sales of Tagrisso in Japan increased by 21% in the year to date (18% at CER) to $191m, reflecting focused activities to maximise testing and utilisation rates in the 2nd-line indication. During the third quarter, Tagrisso was approved in Japan as a 1st-line treatment for patients with EGFRm NSCLC.

Imfinzi

Imfinzi is approved for the treatment of patients with unresectable, Stage III NSCLC whose disease has not progressed following concurrent platinum-based chemotherapy and radiation therapy (CRT); it is approved in more than 40 countries, including the US, in the EU and Japan. It is also approved for the 2nd-line treatment of patients with locally-advanced or metastatic urothelial carcinoma (bladder cancer) in a number of countries, including the US.

During the period, approval was granted for Imfinzi in the EU for the treatment of locally-advanced, unresectable NSCLC in adult patients whose tumours express programmed death-ligand 1 (PD-L1) on 1% or more of tumour cells and whose disease has not progressed following platinum-based CRT. All approvals granted since approval was received in the EU have been based on an all-comer population.

Global Product Sales of Imfinzi amounted to $371m in the year to date (Q3 2018: $187m), with sales for the treatment of unresectable, Stage III NSCLC representing the overwhelming majority. The US represented the greater part of the global sales, where Imfinzi was assigned Category 1 status for the treatment of unresectable, Stage III NSCLC within the NCCN guidelines. $23m of sales were recorded in other markets following approvals and launches, with time taken to achieve reimbursement decisions in many markets. Additional regulatory approvals are anticipated in due course.

Iressa

Product Sales of $406m in the year to date; an increase of 2% (down by 2% at CER).

Emerging Markets sales increased by 13% (10% at CER) to $226m; Iressa entered the NRDL in China in 2017. Sales in the US declined by 26% to $20m and increased in Europe by 6% (down 3% at CER) to $85m.

Other Oncology Medicines

Calquence

Product Sales of $38m in the year to date; Calquence was approved and launched in the US in October 2017. The medicine delivered a promising performance, with more than one third of new patients now treated with Calquence in the approved indication.

Legacy: Faslodex

Product Sales of $759m in the year to date; an increase of 8% (6% at CER), reflecting volume growth.

Emerging Markets sales of Faslodex increased by 26% in the year to date (28% at CER) to $111m. US sales increased by 7% to $394m, highlighting a continued strong uptake of the combination with the CDK4/6 class, medicines approved for the treatment of hormone-receptor-positive breast cancer.

Europe sales declined by 12% in the year to date (19% at CER) to $171m, reflecting the impact of generic entrants in certain countries. In June 2017, a label extension, based upon the FALCON trial in the 1st-line setting, was approved in Japan, where sales increased by 56% in the year to date (52% at CER) to $78m, despite the impact of the biennial price cut, implemented in April 2018.

Legacy: Zoladex

Product Sales of $570m in the year to date; an increase of 4% (2% at CER).

Emerging Markets sales of Zoladex increased by 20% in the year to date to $313m. Sales in Europe declined by 5% (12% at CER) to $99m. In the Established ROW region, sales declined by 10% (11% at CER) to $152m, driven by the effects of increased competition. In March 2017, the Company completed an agreement with TerSera for the sale of the commercial rights to Zoladex in the US and Canada.

CVRM

New CVRM sales increased by 14% in the year to date (12% at CER) to $2,901m, partly reflecting the strong performance of Farxiga. Total CVRM sales, which includes Crestor and other legacy medicines, declined by 7% (8% at CER) to $4,963m. Total CVRM sales comprised 32% of total Product Sales in the year to date.

Brilinta

Product Sales of $945m in the year to date; an increase of 21% (18% at CER).

Emerging Markets sales of Brilinta increased by 33% in the year to date (31% at CER) to $232m, bolstered by the entry onto the NRDL in China in 2017. US sales of Brilinta, at $411m, represented an increase of 16%. The performance, underlined by volume growth, was driven primarily by an increase in the number of patients initiated on Brilinta in hospitals and an increase in the volume of 90-day prescriptions. Furthermore, Brilinta continued to deliver increasing levels of market share during the period. US sales increased by 9% in the quarter to $152m.

Sales of Brilique in Europe increased by 21% in the year to date (12% at CER) to $257m, highlighting indication leadership across a number of markets.

Farxiga

Product Sales of $994m in the year to date; an increase of 34% (32% at CER). Farxiga maintained a global leading position within the growing sodium-glucose co-transporter 2 (SGLT2)-inhibitor class.

Emerging Markets sales increased by 51% in the year to date (57% at CER) to $242m, reflecting ongoing launches and improved levels of patient access. In March 2017, Forxiga became the first SGLT2-inhibitor medicine to be approved in China; since the subsequent launch, the medicine has seen growing levels of access.

US sales increased by 24% in the year to date to $420m. The performance in the first half of 2017 was adversely impacted by the Company's affordability programmes; subsequent changes to the Company's approach to these programmes, however, helped to deliver a much-improved performance from Q3 2017 onwards. Despite slowing growth in the US, the SGLT2 class continues to be underpinned by growing evidence around cardiovascular benefits, including data from the CVD-REAL series of studies (first published in May 2017), showing a statistically-significant reduced rate of hospitalisation for heart failure (hHF) and death from any cause compared to other type-2 diabetes medicines.

Sales in Europe increased by 35% in the year to date (25% at CER) to $231m. In Japan, sales increased by 48% (45% to CER) to $46m. Ono Pharmaceutical Co., Ltd, collaborating with AstraZeneca, records in-market sales in Japan.

Bydureon

Product Sales of $446m in the year to date; an increase of 4% (3% at CER). An encouraging Bydureon BCise device launch in the US earlier in the year underpinned a global increase in Q3 2018 sales of 19% to $152m.

Sales in the US increased by 5% in the year to date to $360m; in the quarter, US sales increased by 26% to $126m. This illustrated a continued encouraging performance from the aforementioned Bydureon BCise launch. Favourable sales volumes were driven by continued growth in the glucagon-like peptide-1 class, at the expense of insulin, for more-advanced type-2 diabetes. Bydureon sales in Europe declined by 5% (12% at CER) to $62m. In August 2018, the Company announced that Bydureon BCise had been approved in the European market.

Onglyza 

Product Sales of $395m in the year to date, a decline of 8% (10% at CER).

The overall performance reflected adverse pressures on the dipeptidyl peptidase-4 (DPP-4) class and an acceleration of ongoing diabetes-market dynamics, where patients are moving to medicines and classes of medicines with proven CV benefits. Given the significant future potential of Farxiga, the Company continues to prioritise commercial support over Onglyza.

Sales in Emerging Markets increased by 30% in the year to date (29% at CER) to $121m; this partly reflected the entry onto the NRDL in China in 2017. Sales in Europe declined by 13% (18% at CER) to $68m, highlighting the broader trend of a shift away from the DPP-4 class.

Lokelma

Lokelma's launch programme recently began in the Nordic region. It is approved in the US and EU for the treatment of hyperkalaemia, a serious condition characterised by elevated potassium levels in the blood associated with CV, renal and metabolic diseases.

Legacy: Crestor

Product Sales of $1,080m in the year to date; a decline of 39% (41% at CER).

Sales in China increased by 29% in the year to date (22% at CER) to $351m, a result of underlying demand. Market growth in statin usage, AstraZeneca's commercial strength in China and the Company's successful strategy of broader coverage in China also continued to impact sales favourably.

US sales declined by 48% in the year to date to $128m, underlining the ongoing impact of the entry of multiple Crestor generic medicines in 2016. In Europe, sales declined by 69% (71% at CER) to $159m, reflecting a similar impact that began in 2017. AstraZeneca expects these impacts to recede over time.

In Japan, where AstraZeneca collaborates with Shionogi Co. Ltd, sales declined by 69% in the year to date (70% at CER) to $122m, reflecting the impact of the entry of multiple Crestor competitors in the market in the final quarter of 2017; AstraZeneca expects this impact to recede significantly from 2019. The decline also reflected actions by the Japanese government to focus further on incentives to increase the adoption of generic medicines.

Respiratory

Product Sales of $3,549m in the year to date; an increase of 5% (2% at CER). Respiratory Product Sales represented 23% of total Product Sales, unchanged on the first nine months of 2017.

Symbicort

Product Sales of $1,925m in the year to date; a decline of 6% (9% at CER).

Symbicort continued to lead the global market by volume within the inhaled corticosteroid / long-acting beta agonist (LABA) class.

Emerging Markets sales of Symbicort increased by 13% in the year to date (12% at CER) to $364m. In contrast, US sales declined by 19% to $655m, reflecting continued pricing pressure, the timing of government buying and the impact of managed-market rebates. The performance was in line with expectations, with challenging pricing pressure expected to continue.

In Europe, sales were stable in the year to date (down by 8% at CER) to $588m; the performance reflected the level of competition from other branded and Symbicort-analogue medicines, plus government pricing interventions. Symbicort, however, continued to retain its class-leadership position and stabilise its volume market share in the class, with a number of markets achieving volume growth. In Japan, where Astellas Pharma Co. Ltd (Astellas) assists as a promotional collaborator, sales were stable in the year to date (down by 2% at CER) to $151m, despite the impact of the aforementioned biennial price cut.

Pulmicort 

Product Sales of $897m in the year to date; an increase of 11% (7% at CER).

Emerging Markets, where sales increased by 20% in the year to date (16% at CER) to $688m, represented 77% of global sales of Pulmicort. China, making up the overwhelming majority of Pulmicort sales in Emerging Markets, delivered a particularly strong performance, supported by higher demand, strong underlying volume growth and AstraZeneca's investment in increasing the number of nebulisation centres.

Sales in the US and Europe declined by 24% in the year to date to $81m and increased by 3% (down by 5% at CER) to $68m, respectively, a consequence of the medicine's legacy status in the Western hemisphere.

Fasenra

Product Sales of $172m in the year to date (Q3 2018: $86m).

In November 2017, the Company was granted approval for Fasenra in the US as a treatment for patients with severe, eosinophilic asthma; the approval was followed immediately by the launch of the medicine and US sales amounted to $129m in the year to date. New-to-brand prescription data showed that Fasenra led the class of novel biologic medicines in asthma at the end of the period, despite being third to market.

In Europe and Japan, AstraZeneca was granted regulatory approval in January 2018 on a similar basis to that in the US. In Europe, sales totalled $17m in the year to date, with launches progressing in a number of countries. Sales in Japan amounted to $26m in the year to date, following its launch in the second quarter; Fasenra is already leading the class by value share in Japan.

Daliresp/Daxas

Product Sales of $135m in the year to date; a decline of 7% (8% at CER).

US sales, representing 81% of the global total, declined by 11% to $110m, driven by the impact of low market growth and payer pressures. It is the only oral, selective, long-acting inhibitor of phosphodiesterase-4, an inflammatory enzyme associated with COPD. Sales in Europe increased by 25% (19% at CER) to $20m.

Tudorza/Eklira

Product Sales of $91m in the year to date; a decline of 16% (19% at CER).

Sales in the US declined by 40% to $28m, reflecting the impact of federal purchases. In March 2017, AstraZeneca announced that it had entered a strategic collaboration with Circassia Pharmaceuticals plc (Circassia) for the development and commercialisation of Tudorza in the US, where AstraZeneca records Product Sales. Sales in Europe declined 2% in the year to date (7% at CER) to $54m, impacted by the decline of the overall long-acting muscarinic antagonist (LAMA) monotherapy class.

Duaklir

Product Sales of $73m in the year to date; an increase of 30% (20% at CER).

Duaklir, the Company's first inhaled dual bronchodilator medicine, is now available for patients in over 25 countries, with almost all sales emanating from Europe. Germany and the UK accounted for 54% of all European sales in the year to date. The global LAMA/LABA class continued to grow in the period, albeit below expectations.

Bevespi 

Product Sales increased by 188% in the year to date to $23m.

Introduced in the US in Q1 2017, Bevespi saw prescriptions in the period track in line with other LAMA/LABA launches; the overall class in the US, however, continued to grow more slowly than anticipated previously. Bevespi was the first medicine launched using the Company's proprietary co-suspension technology.

Other

Product Sales of $2,508m; a decline of 18% (20% at CER). Other Product Sales represented 16% of total Product Sales, down from 21% in the first nine months of 2017.

Nexium 

Product Sales of $1,312m in the year to date; a decline of 14% (16% at CER).

Emerging Markets sales increased by 2% in the year to date (stable at CER) to $524m, while sales in the US declined by 44% to $249m; in Europe, sales increased by 2% (down by 5% at CER) at $179m. On 30 October 2018, AstraZeneca announced that it had agreed to divest the prescription medicine rights to Nexium in Europe. In Japan, where AstraZeneca collaborates with Daiichi Sankyo Company, Limited, sales declined by 6% (8% at CER) to $309m, reflecting the aforementioned biennial price cut.

Synagis 

Product Sales of $414m in the year to date; a decline of 9%.

US sales declined by 27% to $133m and continued to be impacted by the prevailing guidelines from the American Academy of Pediatrics Committee on Infectious Diseases. Product Sales to AbbVie Inc., responsible for the commercialisation of Synagis in over 80 countries outside the US, increased by 4% to $281m.

Seroquel XR

Product Sales of $169m in the year to date; a decline of 25% (26% at CER).

Sales of Seroquel XR in the US declined by 35% to $67m, reflecting the ongoing impact of generic-medicine competition. Sales of Seroquel XR in Europe declined by 21% (26% at CER) to $48m, highlighting a similar impact. In May 2018, the Company announced that it had entered into an agreement with Luye Pharma Group, Ltd. (Luye Pharma) for the sale and licence of the rights to Seroquel and Seroquel XR in the UK, China and other markets, impacting Product Sales growth in the quarter.

FluMist/Fluenz

Product Sales of $35m in the year to date; an increase of 75%. FluMist returned to the US market in Q3 2018 in time for the 2018-2019 influenza season and US sales amounted to $15m (H1 2018: $nil). Sales of Fluenz in Europe increased by 11% to $20m.

Table 10: Regional Product Sales

Emerging Markets

Product Sales of $5,124m in the year to date, an increase of 13% (12% at CER). Q3 2018 sales of $1,700m represented an increase of 12% (16% at CER) and continued the strong double-digit growth seen in prior periods.

China sales, comprising 56% of total Emerging Markets sales, increased by 33% in the year to date (27% at CER) to $2,847m and by 32% in the quarter to $954m. New medicines delivered particularly encouraging sales growth, compounded by strong performances from Pulmicort, Seloken, Crestor, Symbicort and Zoladex. The new medicines represented 11% of China sales in the year to date, up from 7% in the first nine months of 2017. On 25 October 2018, the Chinese National Health Commission and the State Administration of Traditional Chinese Medicines published the 2018 Essential Drug List (EDL), which expands the listing from 520 medicines on the 2012 list to 685 medicines in the updated version; six additional AstraZeneca medicines were included in the updated EDL, namely Iressa, Brilinta, Forxiga, Crestor, Pulmicort and Symbicort.

Oncology sales in China increased by 55% in the year to date (48% at CER) to $646m, reflecting primarily the contribution from Tagrisso, Zoladex and Iressa. Tagrisso was launched in China in 2017 for the 2nd-line treatment of patients with EGFR T790M-mutated NSCLC. During the period, AstraZeneca and the Chinese government also agreed on a public price for Tagrisso and subsequent inclusion on the NRDL with effect from 2019. The 1st-line regulatory submission for Tagrisso is currently under review in China, with a decision expected in the second half of 2019. During the period, Lynparza received approval and was subsequently launched in China for the maintenance treatment of patients with recurrent platinum-sensitive ovarian cancer. The medicine was the first PARP inhibitor to be approved in China.

CVRM medicine sales increased 31% in the year to date (25% at CER) to $991m with New CVRM medicines, namely, Brilinta and Farxiga, representing 15% of all CVRM sales in China. Respiratory sales in Emerging Markets increased by 19% in the year to date (15% at CER) to $1,147m, primarily due to sales of Pulmicort, in which AstraZeneca has invested in over 15,000 nebulisation centres, as well as the growth of Symbicort.

Emerging Markets sales excluding China, however, declined by 4% in the year to date (2% at CER) to $2,277m, impacted by the Company's externalisation activities and the consequent loss of Product Sales. Macro-economic challenges in Argentina and Turkey, together with government interventions in Russia, impacted sales. The performance in Russia, where sales declined by 28% (24% at CER) to $123m, was primarily due to the performance of a number of medicines including Zoladex, Faslodex, Iressa, Nexium and Symbicort. Russia sales in the quarter, however, increased by 2% (11% at CER) to $56m. In the Middle East, Africa & Other region, sales declined by 15% (12% at CER) to $731m, reflecting the slowdown in the Gulf region, import restrictions in North Africa and the entry of generic Nexium and Crestor in South Africa.

US

Product Sales of $4,839m; an increase of 10%. Q3 2018 sales increased by 25% to $1,737m.

New medicines represented 45% of US Product Sales in the year to date. The performance during the period reflected, in particular, the success of the new Oncology medicines, including Tagrisso, Lynparza, Imfinzi and Calquence, plus the strong performance of Fasenra in Respiratory.

Oncology sales increased by 107% in the year to date to $1,620m; Q3 2018 Oncology sales increased 138% to $656m. The new Oncology medicines comprised 74% of total Oncology sales in the US, up from 47% in the first nine months of 2017. Tagrisso sales increased by 109% in the year to date to $580m, following the approval in April 2018 as a 1st-line treatment for patients with EGFR-mutated NSCLC. Lynparza sales amounted to $233m and represented growth of 168% in the year to date. Imfinzi sales in the US were $348m, following the approval of Imfinzi in February 2018 as a medicine for the treatment of unresectable, Stage III NSCLC. Calquence sales in the year to date were $38m, primarily reflecting demand from patients with previously-treated mantle cell lymphoma.

CVRM sales declined by 4% in the US in the year to date to $1,602m; they increased by 1%, however, to $573m in the quarter. The decline was driven principally by established medicines but was offset by the strong sales performance of new CVRM medicines, including Brilinta, Farxiga and Bydureon BCise, which represented 30% of US Product Sales in the year to date.

Respiratory sales declined by 6% in the US in the year to date to $1,030m (Q3 2018: +1%), reflecting continued competitive intensity on sales of Symbicort, which itself saw a sales decline of 19% in the year to date to $655m. In contrast, Fasenra continued its strong launch, following the approval for the treatment of severe eosinophilic asthma in November 2017, with sales amounting to $129m in the year to date.

Europe

Product Sales of $3,286m in the year to date; a decline of 5% (11% at CER), reflecting the impact of the entry of generic Crestor medicines in various European markets in 2017 and continued competitive and price pressures.

Crestor sales in Europe declined by 69% in the year to date (71% at CER) to $159m and represented 5% of Europe sales. AstraZeneca expects this impact to recede in the future. Excluding sales of Crestor, Europe sales increased by 6% (down by 1% at CER) to $3,127m.

The new medicines delivered an encouraging performance in the year to date, representing 27% of Europe Product Sales. Oncology sales in Europe increased by 19% (11% at CER) to $766m, partly driven by Tagrisso sales growth of 79% (68% at CER) to $222m. In June 2018, the medicine was approved in the EU for the treatment of patients in the 1st-line EGFRm setting, with immediate launches supporting the performance.

Lynparza sales of $137m represented growth of 46% (37% at CER), partly benefitting from the approval in May 2018 for Lynparza tablets for patients with platinum-sensitive ovarian cancer, regardless of BRCA status. Imfinzi was approved by the EMA for the majority of patients with locally-advanced, unresectable NSCLC in September 2018; sales in Europe in the year to date amounted to $9m.

CVRM sales declined by 25% in the year to date (30% at CER) to $935m, driven by the aforementioned entry of generic Crestor medicines in various European markets in 2017. New CVRM sales increased 16% in the year to date in Europe (8% at CER) to $640m, representing 68% of total CVRM sales, up from 44% in the first nine months of 2017. Brilique sales increased by 21% (12% at CER) to $257m, primarily due to strong growth in Spain and Germany. Forxiga sales increased by 35% (25% at CER) to $231m following the growth of the SGLT2 inhibitor class in Europe and increased demand.

Respiratory sales of $922m represented growth of 5% (down by 2% at CER). Symbicort sales were stable (down by 8% at CER) at $588m in the year to date. The medicine continued to retain its class-leadership position and stabilise its volume market share in the class, with some markets achieving volume growth. Fasenra was launched successfully in Europe, with a strong initial uptake and sales of $17m in the year to date (Q3 2018 $9m).

Established ROW

Product Sales of $2,032m; a decline of 11% (down by 13% at CER).

Japan sales declined by 14% (16% at CER) to $1,416m. The impact of the entry of generic Crestor medicines in 2017 was felt faster than expected; the biennial price reduction also adversely affected sales. Crestor sales in Japan declined by 69% (70% at CER) to $122m and represented 9% of Japan sales in the year to date. AstraZeneca expects the generic Crestor impact to recede significantly from 2019. Excluding sales of Crestor, Japan sales increased by 3% (1% at CER) to $1,294m. The impact of the biennial price reduction was 8.6% across AstraZeneca medicines; adjusting for the Nexium 'huge-seller' repricing adjustment of 16%, the price decline was c.7%.

The new medicines delivered an encouraging performance in Japan and comprised 21% of Product Sales in the year to date. Oncology sales increased by 8% (6% at CER) to $626m, reflecting the strong performance of Tagrisso, which increased by 21% (18% at CER) to $191m; Tagrisso was approved for the treatment of patients in the 1st-line EGFRm setting in August 2018. Lynparza sales in Japan amounted to $25m in the year to date, following the aforementioned approvals in breast and ovarian cancer. The approval of Imfinzi in August 2018 for the treatment of patients with unresectable, Stage III NSCLC also benefitted the performance.

CVRM, representing 14% of Japan sales, saw Forxiga sales increase by 48% in the year to date (45% at CER) to $46m. Respiratory sales of $223m represented growth of 15% (13% at CER), underpinned by stable Symbicort sales (down by 2% at CER) of $151m and stable Pulmicort sales (down by 3% at CER) of $40m. Fasenra sales amounted to $26m in the year to date, representing 12% of Respiratory sales, up from 8% in H1 2018, to become the leading asthma biologic medicine in Japan. Overall Established ROW sales, excluding Japan, declined by 4% in the year to date (5% at CER) to $615m, due primarily to the performance of Symbicort in Australia; new medicines, however, demonstrated strong growth.

Table 11: YTD 2018 Reported Profit and Loss

Table 12: Q3 2018 Reported Profit and Loss

Table 13: Reconciliation of Reported Profit Before Tax to EBITDA29

Table 14: YTD 2018 Reconciliation of Reported to Core Financial Measures

Table 15: Q3 2018 Reconciliation of Reported to Core Financial Measures

Profit and Loss Commentary

Gross Profit

Reported Gross Profit declined by 9% in the year to date (11% at CER) to $12,374m; Core Gross Profit declined by 9% (10% at CER) to $12,590m. The declines primarily reflected the lower level of Externalisation Revenue and the Gross Margin.

The calculation of Reported and Core Gross Margin excludes the impact of Externalisation Revenue, thereby reflecting the underlying performance of Product Sales. The Reported Gross Margin declined by two percentage points in the year to date to 78.4%; the Core Gross Margin declined by two percentage points to 79.8%. The movements were a result of the favourable impact of manufacturing variances realised in H1 2017, the inclusion of the profit share on the collaboration with MSD, as well as the effect of losses of exclusivity on Crestor sales in Europe and Japan, partly offset by the growing favourable impact of Oncology sales.

Operating Expenses: R&D

Reported R&D costs declined by 7% in the year to date (8% at CER) to $3,920m. Targeted investment in the Company's pipeline of medicines is a consistent priority; AstraZeneca, however, is continuing to focus on resource prioritisation, productivity improvements across every therapy area, simplification and improved development processes, all helping to deliver cost reductions. Importantly, high levels of activity remain unchanged, illustrated by the 63 Phase III projects ongoing as at the end of the quarter (end of Q3 2017: 56).

Highlights of the progress made include:

· Moving late-stage-execution roles to lower-cost locations

· Reducing supply waste

· Optimising protocols, including a review of the number of procedures, countries involved and in-sourcing a larger proportion of clinical trials

Core R&D costs declined by 4% in the year to date (6% at CER) to $3,800m, reflecting the aforementioned productivity improvements. Core R&D costs represented 24% of Total Revenue (23% in Q3 2018). Core R&D costs in FY 2018 are now anticipated to decline by a low single-digit percentage at CER.

Operating Expenses: SG&A

Reported SG&A costs increased by 4% in the year to date (1% at CER) to $7,431m. Investment focused on commercial and medical-affairs support for launches and extensions of the new medicines. These included Lynparza, Tagrisso, Imfinzi, Calquence and Fasenra; additional investment was also added to support sales growth in China. Intangible Asset Amortisation and Impairment charges of $1,067m, recorded within Reported SG&A Costs, partly reflected the impact of recent regulatory approvals granted for acquired medicines.

Core SG&A costs increased by 10% in the year to date (7% at CER) to $6,215m, reflecting the aforementioned investments. Total Core SG&A costs are now expected to increase, at CER, broadly in line with the rate seen in the year to date, reflecting support for medicine launches. The Company will retain flexibility in its investment approach, watching closely its impact on Product Sales.

Other Operating Income & Expense

Where AstraZeneca does not retain a significant ongoing interest in medicines or potential new medicines, income from divestments is reported within Other Operating Income & Expense in the Company's financial statements. Reported Other Operating Income & Expense increased by 55% in the year to date to $1,525m and included:

· $527m, reflecting an agreement with Luye Pharma for the rights to Seroquel and Seroquel XR in the UK, China and other international markets

· $346m, resulting from a legal settlement

· $210m, recognised in the third quarter, reflecting an agreement with Cheplapharm Arzneimittel GmbH for the commercial rights to Atacand and Atacand Plus in Europe

· $174m, recognised in the third quarter, reflecting a milestone payment under an agreement with Aspen Global Incorporated, part of the Aspen Group, for the commercialisation rights to anaesthetic medicines in markets outside the US

· $63m, representing a gain on the spin-out of six potential new medicines from MedImmune's early-stage inflammation and autoimmunity programme into an independent biotech company, as announced on 28 February 2018

Core Other Operating Income & Expense increased by 4% in the year to date (3% at CER) to $1,143m, with the difference to Reported Other Operating Income & Expense reflecting the aforementioned legal settlement.

Operating Profit

Reported Operating Profit declined by 23% in the year to date (20% at CER) to $2,310m, partly driven by the declines in Total Revenue and the Reported Gross Margin, as well as the increase in Reported SG&A costs. Restructuring costs reduced to $271m in the year to date (YTD 2017: $645m). The Reported Operating Profit margin declined by three percentage points in the year to date (two at CER) to 15% of Total Revenue.

Core Operating Profit declined by 31% in the year to date to $3,480m, driven by the aforementioned factors, as well as the timing of divestments in FY 2018. The Core Operating Profit margin declined by eight percentage points to 22% of Total Revenue.

Net Finance Expense

Reported Net Finance Expense declined by 14% in the year to date (4% at CER) to $970m, reflecting an adverse foreign-exchange impact in the comparative period and reduced levels of discount unwind on Acerta Pharma B.V. (Acerta Pharma) liabilities. Excluding the discount-unwind on acquisition-related liabilities and the adverse foreign exchange impact in the comparative period, Core Net Finance Expense increased by 7% in the year to date (4% at CER) to $561m, partly reflecting the level of Net Debt.

Profit Before Tax

Reported Profit Before Tax declined by 31% in the year to date to $1,263m, reflecting the lower level of Externalisation Revenue, the lower Reported Gross Margin and the increase in Reported SG&A costs.

Taxation

The Reported and Core Tax Rates for the year to date were 18% and 19% respectively. The net cash tax paid for the year to date was $406m, representing 32% of Reported Profit Before Tax. The Reported and Core Tax rates for the comparative period were 12% and 18% respectively. The net cash tax paid for the comparative period was $473m, which was 26% of Reported Profit Before Tax.

Earnings Per Share (EPS)

Reported EPS of $0.88 in the year to date represented a decline of 34%. The performance reflected a decline in Total Revenue, the Reported Gross Margin and the increase in Reported SG&A costs. Core EPS declined by 37% to $1.88.

Table 16: Cash Flow

The Company delivered a net cash inflow from operating activities of $394m in the year to date, compared with an inflow of $2,581m in the first nine months of 2017, reflecting the increase in the movement of working-capital and short-term provisions impacted by the reduction of provisions related to legal settlements, as well as launch support for new medicines. The performance also reflected the reduction in Reported Operating Profit.

Net cash inflows from investing activities were $36m, compared with outflows of $686m in the first nine months of 2017. The difference partly reflected the increase in Reported Other Operating Income & Expense, a reduction in capital expenditure as well as movements in short-term investments and fixed deposits. The cash payment of contingent consideration, in respect of the Bristol-Myers Squibb share of the global Diabetes alliance, amounted to $247m in the year to date.

Net cash outflows from financing activities were $312m in the year to date, compared to outflows of $2,924m in the first nine months of 2017; the difference reflected new long-term loans and the repayment of loans in the earlier period.

Capital Expenditure

Capital expenditure amounted to $728m in the year to date, compared to $849m in the first nine months of 2017, which included the investment in the new global headquarters in Cambridge, UK, as well as strategic biotech manufacturing capacity in Sweden. AstraZeneca anticipates a reduction in capital expenditure over the full year vs. FY 2017.

Table 17: Debt and Capital Structure

Capital Allocation

The Board's aim is to continue to strike a balance between the interests of the business, financial creditors and the Company's shareholders. After providing for investment in the business, supporting the progressive dividend policy and maintaining a strong, investment-grade credit rating, the Board will keep under review potential investment in immediately earnings-accretive, value-enhancing opportunities.

Foreign Exchange

The Group's transactional currency exposures on working-capital balances, which typically extend for up to three months, are hedged where practicable using forward foreign-exchange contracts against the individual Group Companies' reporting currency. In addition, the Group's external dividend payments, paid principally in pounds sterling and Swedish krona, are fully hedged from announcement to payment date. Foreign-exchange gains and losses on forward contracts for transactional hedging are taken to profit.

Table 18: Currency Sensitivities

The Company provides the following currency-sensitivity information:

a) Nexium Divestment in the EU and Vimovo Divestment in Ex.US/JP Markets

On 30 October 2018, AstraZeneca announced that it had agreed to divest the prescription medicine rights to Nexium in Europe, as well as the global rights (excluding the US and Japan) to Vimovo to Grünenthal. The divestments are expected to complete in 2018. For Nexium, Grünenthal will make an upfront payment of $700m upon completion. AstraZeneca may also receive future milestones and sales-related payments of up to $90m. For Vimovo, Grünenthal will make an upfront payment of $115m upon completion. AstraZeneca may also receive future milestones and sales-related payments of up to $17m. Upfront and milestone receipts, excluding a proportionate derecognition of an intangible asset relating to Vimovo, will be reported as Other Operating Income & Expense in the Company's financial statements.

AstraZeneca will continue to commercialise Nexium in all markets outside Europe, where the Company retains the rights. On completion of the agreements, AstraZeneca will not retain any ownership rights to Vimovo globally, or to Nexium in Europe. Nexium sales in Europe in H1 2018 were $121m; Vimovo global sales excluding the US and Japan in the same period were $37m. AstraZeneca will continue to manufacture and supply Nexium under a long-term supply agreement.

b) Divestment of Global Rights to Alvesco, Omnaris and Zetonna

On 6 November 2018, AstraZeneca announced an agreement with Covis Pharma B.V. (Covis Pharma) to sell its rights to respiratory medicines Alvesco, Omnaris and Zetonna. The active ingredient in all three medicines is ciclesonide, a synthetic corticosteroid that helps relieve inflammation The rights cover markets outside the US and the US royalties for the medicines. Covis Pharma currently commercialises Alvesco, Omnaris and Zetonna in the US and will become the owner of the medicines upon closing.

Under the terms of the agreement, Covis Pharma will pay AstraZeneca $350m upon closing, in addition to conditional sales-related payments of up to $21m over four years from 2019. As AstraZeneca will not maintain a significant ongoing interest in the medicines following completion, the upfront (excluding a derecognition of an intangible asset) and future receipts, will be recognised as Other Operating Income & Expense in the Company's financial statements. The agreement is expected to complete by the end of 2018.

c) Atacand Divestment in Europe

In July 2018, AstraZeneca announced that it had agreed to sell the commercial rights to Atacand (candesartan cilexetil) and Atacand Plus (fixed-dose combination of candesartan cilexetil and hydrochlorothiazide) in Europe to Cheplapharm Arzneimittel GmbH (Cheplapharm). Atacand is a prescription medicine for the treatment of heart failure (HF) and hypertension. The agreement completed later in the quarter. AstraZeneca will continue to manufacture and supply Atacand and Atacand Plus under a supply agreement and will continue to commercialise the medicines in all markets where it still holds the rights.

Cheplapharm paid AstraZeneca $200m on completion of the agreement and will pay a time-bound payment of $10m and sales-contingent milestones. The present value of the upfront and time-bound payment, $210m, was reported as Other Operating Income in the Company's financial statements.

d) Zurampic Return of Rights in the US

In April 2016, AstraZeneca announced that it had entered into a licensing agreement with Ironwood Pharmaceuticals Inc. (Ironwood) for the exclusive US rights to Zurampic (lesinurad). Zurampic was approved by the US FDA in December 2015, in combination with a xanthine oxidase inhibitor, for the treatment of hyperuricaemia associated with uncontrolled gout.

In August 2018, Ironwood issued a contract termination letter, with an effective date of 180 days from date of receipt, with respect to Zurampic and Duzallo (Zurampic/allopurinol fixed-dose combination). The Company is evaluating the implications of Ironwood's notification and will consider patient needs in the process.

e) AstraZeneca Strengthens Oncology Development and Commercialisation Collaboration with Innate Pharma

In October 2018, AstraZeneca and its global biologics research and development arm MedImmune announced a new multi-term agreement with Innate Pharma, building on an existing collaboration. The extension enriches AstraZeneca's immuno-oncology (IO) portfolio with pre-clinical and clinical potential new medicines. AstraZeneca obtained full Oncology rights to the first-in-class humanised anti-NKG2A antibody, monalizumab. AstraZeneca also gained option rights to IPH5201, an antibody targeting CD39, as well as four preclinical molecules from Innate Pharma's pipeline. Innate Pharma licenced the US and EU commercial rights to recently US FDA-approved Lumoxiti for hairy cell leukaemia; Lumoxiti launched in the US in October 2018.

AstraZeneca will recognise $50m upfront for Lumoxiti in Q4 2018 as Other Operating Income and anticipates receipt of $25m for future commercial and regulatory milestones, in consideration for its intellectual property and clinical and manufacturing development of the medicine. AstraZeneca will pay Innate Pharma $100m in the first quarter of 2019 for the expansion of the monalizumab collaboration. Additional financial arrangements related to monalizumab are detailed and available in the 2015 collaboration announcement. Further, AstraZeneca will pay Innate Pharma $50m upfront for the development collaboration and option for further co-development and co-commercialisation of Innate Pharma's CD39 monoclonal antibody, IPH5201.

AstraZeneca also paid Innate Pharma $20m upfront for an exclusive license option on four to-be-agreed molecules from Innate Pharma's pre-clinical portfolio. These options can be exercised before the molecules reach clinical development, triggering an option exercise fee in addition to milestones and royalties. Innate Pharma will have the potential for co-promotion and profit sharing in the EU, dependent on future progress. Given the long-term collaboration between the two companies, AstraZeneca recently acquired a 9.8% equity stake in Innate Pharma, in line with the agreement, through the issuance of 6,260,500 new shares to AstraZeneca at €10/share (€62.6m).

AstraZeneca's sustainability ambition has three priority areas39, aligned with the Company's purpose and business strategy:

· Access to healthcare

· Environmental protection

· Ethics and transparency

Recent developments and progress against the priorities are reported below:

a) Access to Healthcare

In October 2018, Pascal Soriot, Chief Executive Officer and Katarina Ageborg, Executive Vice President, Sustainability and Chief Compliance Officer, visited Kenya to celebrate the fourth anniversary of the Healthy Heart Africa (HHA) programme. The visit included co-hosting an event on Public-Private-Partnerships to combat NCDs with the UN and Kenyan Ministry of Health, as well as the local launch of the Dunga Beach programme, announced in May 2018, with Kenyan media.

One of the key aims of the HHA programme is to educate and raise awareness about hypertension. During the period, five AstraZeneca employees were selected to join the HHA Ambassador programme, a skills-based mentoring initiative that matches AstraZeneca employees with local partners in Kenya, bringing expertise and experience to make a real impact to the HHA programme.

During the period, the Young Health Programme (YHP) was recognised at the Ethical Corporation 2018 Responsible Business Awards, winning the Community Investment of the Year award, with particular commendation for the programme's investment-to-output ratio and its clear link to the business strategy.

b) Environmental Protection

In October 2018, AstraZeneca published a paper in the journal Environmental Science and Technology, together with researchers at Kings College London, the Universities of Northumbria and Suffolk and the Francis Crick Institute, calling for the wider application of machine learning in environmental toxicology research, to improve environmental protection, reduce the burden on animal testing and better meet the future challenges of scientific discovery. The publication is the result of a recent collaboration between these academic and industry bodies and highlights the impact of chemicals on the environment.

During the period, the Company published a position statement on Pharmaceuticals in the Environment (PIE). AstraZeneca proactively manages the risks associated with PIE to ensure the environmental safety of its products. The AMR Industry Alliance has also published manufacturing discharge targets for antibiotics to limit antimicrobial resistance risk in environmental waters downstream of medicine production. On 25 September 2018, the targets were launched at the Center for Disease Control (CDC) meeting at the 73rd Session of the UN General Assembly (UNGA). The wider industry has followed the approach that AstraZeneca published in 2017 in Environmental International; where the Company co-funded and co-authored the work of Le Page et al. and Brandt et al. that formed the basis of this industry-consensus position.

Table 19: Environmental Protection Targets40

c) Ethics and Transparency

The Company launched its annual Code of Ethics training to all employees in September 2018. The Code of Ethics supports employees around the globe in understanding why and how the Company's Values guide behaviour and help colleagues make better decisions in the long-term interests of the Company.

At its Annual General Meeting 2018, AstraZeneca committed to providing greater transparency around payments to healthcare professionals (HCPs) and Healthcare Organisations (HCOs). The Company currently discloses payments to HCPs, HCOs and patient groups across 38 countries, including Europe, the US, Japan and Australia, in accordance with all current regulations and reporting requirements. AstraZeneca's current disclosures comprise over 90% of all such disclosures possible worldwide; the Company is committed, however, to expanding its payments disclosure to a further 11 countries across Latin America, Asia Pacific, North Africa and the Middle East regions by the end of 2019.

During the period, the Company made further progress against these plans by focusing on reporting requirements in markets with current and pending regulations; completing a gap assessment to develop an understanding of market-level operations and beginning to design, build, and formally integrate countries into its reporting platform.

From data gathered from existing filings, and internal financial systems for countries with no existing regulatory requirements42, progress against this commitment is as follows:

· Existing reporting across the US, Europe, Australia, Japan, the Philippines and Indonesia accounts for 93% of reportable activity with HCPs across the 38 countries with existing requirements

· The Company is currently working to integrate Brazil, Korea, Mexico, and Saudi (by end 2018) and Argentina, Canada, Chile, India, Morocco, New Zealand (by end 2019) with these countries accounting for an additional 2% of coverage of reportable spend/activity with HCPs

· Countries due to commence work to meet this commitment account for the remaining 5% of coverage

Other Developments

During the period, the Company was recognised for its sustainability efforts in the 2018 World Dow Jones Sustainability Index (DJSI) World, retaining third position in the pharmaceutical industry. The DJSI is the longest-running, global sustainability benchmark system and is based on an in-depth analysis of companies economic, social and environmental performance. Of 50 companies assessed from the Pharmaceuticals Industry Group, only seven qualified for inclusion in the DJSI. AstraZeneca received the industry's top score in the areas of Environmental Reporting, Labour Practice Indicators and Health Outcome Contribution. AstraZeneca's overall percentile increased by one point to the 96th percentile. The DJSI uses a consistent, rules-based methodology to convert an average of 600 data points per company into one overall score. This score determines inclusion in the DJSI. This marked the 17th time the Company has been included in the Index.

A comprehensive data pack comprising AstraZeneca's pipeline of medicines in human trials can be found in the clinical-trials appendix, available on astrazeneca.com. Highlights of developments in the Company's late-stage pipeline since the prior results announcement are shown below:

Table 20: Update from the Late-Stage Pipeline

Oncology

AstraZeneca has a deep-rooted heritage in Oncology and offers a new generation of medicines that have the potential to transform patients' lives and the Company's future. At least six Oncology medicines are expected to be launched between 2014 and 2020, of which Lynparza, Tagrisso, Imfinzi, Calquence and Lumoxiti are already benefitting patients. An extensive pipeline of small-molecule and biologic medicines is in development and the Company is committed to advancing Oncology medicines, primarily focused on the treatment of patients with lung, ovarian, breast and blood cancers.

In September and October 2018, the Company presented further evidence of its progress at the International Association for the Study of Lung Cancer World Congress on Lung Cancer (WCLC) in Toronto and the European Society for Medical Oncology (ESMO) Congress in Munich. This was illustrated by Presidential sessions for the Imfinzi PACIFIC and Lynparza SOLO-1 presentations.

a) Lynparza (multiple cancers)

In August 2018, the Company was granted approval from the China NMPA for Lynparza for the maintenance treatment of adult patients with platinum-sensitive relapsed epithelial ovarian, fallopian tube or primary peritoneal cancer, who are in a complete or partial response to platinum-based chemotherapy. This made Lynparza the first PARP inhibitor to be approved in China and was the latest example of the Company's commitment to develop and deliver innovative medicines for patients in China. Approval was granted based on two pivotal trials - the Phase III SOLO-2 trial and the Phase II Study 19 trial.

During the period, the Company announced that it had been granted Orphan Drug Designation by the US FDA for Lynparza for the treatment of pancreatic cancer. Pancreatic cancer is a rare, life-threatening disease that accounts for c.3% of all cancers in the US. Due to the late onset of symptoms, patients are often diagnosed after the cancer has progressed to locally-advanced or metastatic stages of the disease; five-year survival rates remain low in the US, below 10%.

In October 2018, AstraZeneca and MSD announced detailed results from the aforementioned SOLO-1 trial, testing Lynparza tablets as a maintenance treatment for patients with newly-diagnosed, advanced BRCAm ovarian cancer who were in complete or partial response, following 1st-line standard platinum-based chemotherapy. Results of the trial confirmed the statistically-significant and clinically-meaningful improvement in progression-free survival (PFS) for Lynparza compared to placebo, reducing the risk of disease progression or death by 70% (HR 0.30 [95% CI 0.23-0.41], pLynparza was not reached, compared to 13.8 months for patients treated with placebo. Of those patients receiving Lynparza, 60% remained progression-free at 36 months, compared to 27% of patients in the placebo arm. The data were presented at the ESMO Congress and published simultaneously online in the New England Journal of Medicine.

Based on the SOLO-1 trial data, the Company made regulatory submissions in the EU, Japan and China for Lynparza in newly-diagnosed patients with BRCAm advanced ovarian cancer, following 1st-line platinum-based chemotherapy.

Table 21: Lynparza Combination Trials