r r

INDEPENDENT RESEARCH AstraZeneca 17th January 2013 Attractive risk-reward as new CEO comes in

Healthcare Fair Value 3440p vs. 2860p (price 3,042p) BUY vs. NEUTRAL

Bloomberg AZN LN Reuters AZN.L 12-month High / Low (p) 3,112 / 2,591 Market capitalisation (GBPm) 37,921 Enterprise Value (BG estimates GBPm) 39,062 Avg. 6m daily volume ('000 shares) 2,247 Free Float 100% 3y EPS CAGR [2012-2015] -1.2% Gearing (12/11) 8% Dividend yields (12/12e) 5.72%

Among the big names in the pharmaceutical industry, AstraZeneca is obviously one of the few which carries in principle one of the most significant upsides considering its current valuation, provided the new CEO, Pascal Soriot, is able not only to present a comprehensive and clear strategy but also to package his speech in an attractive manner for the investment community to jump in as early as the beginning of 2013.

On 31 January 2013, Pascal Soriot is expected to present his initial thoughts about how to drive AstraZeneca forward and which strategy to implement. Since he took over as CEO on 1 October 2012, he has spent much time meeting people within the group and also key shareholders to make the best possible assessment of the situation and to hear their expectations and hopes before presenting a roadmap.

However, based on what he already disclosed during the Q3 conference call, we believe it is worth addressing (i.e. before his speech) the points Pascal Soriot is likely to highlight to try and convince investors that a new story is ahead, including growth platforms to act upon.

Although AstraZeneca is a strange animal, the situation is not that different to what Chris Viehbacher embraced when he joined Sanofi. And if Pascal Soriot is as good and convincing as his peer four years ago then things could change fairly quickly and the stock behave accordingly. As it is not diversified, AstraZeneca has fewer possibilities to offset patent losses and/or R&D delivery delays but obviously Brilinta, the diabetes franchise, or emerging markets are assets that could be more efficiently managed. Japan and/or biologics at a later stage are too. And we might believe that a former Roche Head may have some ideas about how to reshuffle the oncology franchise as well.

In the end, although it is difficult to anticipate what Pascal Soriot will tell, we deem the consensus is undemanding and as a consequence the risk-reward on the share is likely to be unbalanced in favour of the upside. As a consequence, with a new FV of 3,440p we are upgrading the stock to BUY.

YE December 12/11 12/12e 12/13e 12/14e Revenue (USDm) 33,591 28,081 27,524 27,251 EBIT(USDm) 12,795 7,921 7,818 8,334 Basic EPS (USD) 7.33 4.81 4.58 5.04 Core EPS (USD) 7.72 6.71 6.13 6.33 EV/Sales 1.9x 2.2x 2.2x 2.0x EV/EBITDA 4.1x 6.0x 5.6x 5.0x EV/EBIT 4.9x 7.9x 7.6x 6.7x P/E 6.3x 7.3x 8.0x 7.7x ROCE 39.3 20.5 21.1 23.5 Price as close of 15/01/13

16/1/13

J F M A M J J A S O N D J 80

85

90

95

100

105

110

115

120

ASTRAZENECA STOXX EUROPE 600 E - PRICE INDEX

Source: Thomson Reuters Datastream

Analyst: Sector Analyst Team: Eric Le Berrigaud Mathieu Chabert 33(0) 1 56 68 75 33 Martial Descoutures eleberrigaud@bryangarnier.com

AstraZeneca

2

Profit & Loss account (USDm) 2009 2010 2011 2012e 2013e 2014e 2015e 2016e Sales 32,660 33,269 33,591 28,081 27,524 27,251 27,082 26,505 Change (%) 3.4% 1.9% 1.0% -16.4% -2.0% -1.0% -0.6% -2.1% EBITDA 13,630 14,235 15,345 10,521 10,618 11,134 11,287 11,095 EBIT 11,399 11,494 12,795 7,921 7,818 8,334 8,487 8,295 Change (%) 24.7% 0.8% 11.3% -38.1% -1.3% 6.6% 1.8% -2.3% Core EBIT 13,621 13,603 13,932 11,078 10,267 10,334 10,357 10,165 Change (%) - -0.1% 2.4% -20.5% -7.3% 0.7% 0.2% -1.8% Financial result (736) (517) (428) (448) (463) (397) (317) (241) Pre-Tax profit 10,663 10,977 12,367 7,473 7,355 7,937 8,170 8,054 Exceptionals 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Tax 3,263 2,896 2,351 1,374 1,701 1,846 1,845 1,819 Income from associates 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Minority interests 23.0 25.0 33.0 25.0 25.0 25.0 25.0 25.0 Reported net result 7,377 8,056 9,983 6,074 5,629 6,067 6,300 6,210 Core Net result 8,002 9,645 10,506 8,479 7,524 7,627 7,756 7,666 Change (%) 20.5% 8.9% -19.3% -11.3% 1.4% 1.7% -1.2% Cash-Flow Statement (USDm) Operating cash-flows 10,523 10,772 10,372 8,603 8,517 8,986 9,207 9,114 Change in working capital (2,253) 249 (1,208) 153 (484) (20.7) (48.2) 3.4 Capex (net) 1,586 2,181 1,297 1000 900 900 900 900 Financial investments (269) 138 (289) 4,820 0.0 0.0 0.0 0.0 Dividends paid 2,988 3,371 3,777 3,665 3,438 3,372 3,352 3,352 Net Debt 1,235 (1,838) 1,766 1,836 (1,828) (5,563) (10,566) (15,425) Free Cash flow 10,425 8,481 8,376 2,630 8,102 8,106 8,355 8,210 Balance Sheet (USDm) Shareholder funds 20,821 23,410 23,472 23,151 24,376 26,117 29,096 31,987 + Provisions 5,040 4,410 4,536 4,536 4,536 4,536 4,536 4,536 + Net Debt 1,235 (1,838) 1,766 1,836 (1,828) (5,563) (10,566) (15,425) = Invested Capital 27,096 25,982 29,774 29,523 27,084 25,090 23,066 21,098 Tangible assets 31,160 30,996 29,324 32,744 31,044 29,344 27,644 25,944 + Working Capital 3,671 3,920 2,712 2,865 2,380 2,360 2,311 2,315 + Others / Miscellaneous (9,219) (10,416) (6,510) (6,734) (6,988) (7,262) (7,538) (7,809) = Capital employed 25,612 24,500 25,526 28,875 26,436 24,442 22,418 20,450 Total Balance Sheet 54,920 56,127 52,830 52,110 53,852 55,777 59,014 61,985 Financial Ratios Operating margin 34.90 34.55 38.09 28.21 28.40 30.58 31.34 31.30 Core operating margin 41.71 40.89 41.48 39.45 37.30 37.92 38.24 38.35 Tax rate 30.60 27.00 21.96 20.00 23.00 23.00 0.0 22.58 Net margin 22.59 24.01 29.74 21.20 20.49 22.34 23.29 23.46 ROE (after tax) 40.13 36.23 42.73 25.65 23.83 24.21 22.93 20.44 ROCE (after tax) 30.22 28.70 39.28 20.55 21.12 23.54 33.23 26.88 Gearing 5.93 -7.85 7.52 7.93 -7.50 -21.30 -36.32 -48.22 Distribution rate 45.69 46.27 38.20 58.24 61.08 55.57 53.20 53.97 Number of shares (diluted) (m) 1,448 1,438 1,361 1,263 1,228 1,204 1,197 1,197 Per share data (USD) Reported EPS 5.09 5.60 7.33 4.81 4.58 5.04 5.26 5.19 Restated EPS 5.52 5.51 7.33 4.81 4.58 5.04 5.26 5.19 Core EPS 6.32 6.71 7.72 6.71 6.13 6.33 6.48 6.40 change (%) 24.0% 6.1% 15.1% -13.1% -8.7% 3.4% 2.3% -1.2% Goodwill per share 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 NPV 14.27 16.14 17.08 18.12 19.63 21.44 24.04 26.43 Cash flow per share 7.27 7.49 7.62 6.81 6.94 7.46 7.69 7.61 FCF per share 7.20 5.90 6.15 2.08 6.60 6.73 6.98 6.86 Dividend per share 2.30 2.55 2.80 2.80 2.80 2.80 2.80 2.80

Source: Company Data; Bryan, Garnier & Co ests.

Revenues by product (2011)

Revenues by geography (2011)

Company description AstraZeneca was formed in 1999 by the merger of Swedish Astra and British Zeneca. Originally a life science company, it then span off its agrochemicals business (merged with Novartis’ to form Syngenta) and focused on pharmaceuticals, divesting some other minor diversifications and acquiring biotech capabilities with CAT and then MedImmune. AstraZeneca has strong brands like Nexium, Crestor or Seroquel and is currently facing a deep patent cliff. Time will tell whether R&D revives and is able to deliver new medicines that could offset part of sales lost to patent expiries.

Nexium13%

Atacand4%

Crestor20%

Symbicort10%Arimidex

2%

Seroquel17%

Rest of PTF34%

US40%

France5%

Japan9%

China4%

Canada5%

Rest of emerging

13%

Rest of world24%

AstraZeneca

3

Table of contents

1. Investment Case ........................................................................................................................................... 4

2. When communication matters more than everything else ................................................................... 5

2.1. D-Day is on 31 January 2013 ........................................................................................................... 5

2.2. Consensus expectations are undemanding .................................................................................... 5

2.2.1. First comparisons can be made with existing guidance ................................................. 5 2.2.2. Share buy-back programme was recently frozen ............................................................ 7 2.2.3. R&D pipeline update is likely, with potential cuts ......................................................... 8

2.3. Sanofi not a benchmark but an interesting proxy anyway .......................................................... 9

2.3.1. Some interesting lessons to learn from Sanofi’s experience ......................................... 9 2.3.2. However it is not fully comparable ................................................................................ 11

3. The communication will likely use the “growth platforms” terminology ...................................... 12

3.1. A common wording now in pharmaceuticals............................................................................. 12

3.2. Diabetes is likely to be a focus as the agreement with BMS dramatically changed in 201213

3.3. Soriot considers it is possible to do much better with Brilinta ............................................... 16

3.4. Emerging markets is a natural call ................................................................................................ 21

3.4.1. AstraZeneca is lagging behind its peers ......................................................................... 21 3.4.2. Pure players vs diversified ................................................................................................ 23

3.5. Pipeline in phase II is a free option.............................................................................................. 24

4. Financials and valuation .......................................................................................................................... 29

4.1. M&A activity is likely to go on ..................................................................................................... 29

4.2. Productivity gains still on the cards.............................................................................................. 30

4.3. New Core EPS to be implemented .............................................................................................. 30

4.4. New FV ............................................................................................................................................. 32

4.4.1. Discounted EVA: FV of 3,375p ..................................................................................... 33 4.4.2. DCF: FV of 3,503p ........................................................................................................... 34

APPENDIX: Revenue estimates .............................................................................................................. 35

Price Chart and Rating History .................................................................................................................... 37

Bryan Garnier stock rating system............................................................................................................... 39

AstraZeneca

4

1. Investment Case

The reason for writing now We have high hopes ahead of Pascal Soriot’s first speech to the investment community on 31 January 2013. We believe that beyond numbers, perception matters. AstraZeneca failed on execution in the last few years and more particularly on the R&D front. Even if Simon Lowth did a good job on financials, many other top executive starting with the CEO did not fully convince in their respective positions. The arrival of Pascal Soriot could be as big an impact as that of Chris Viehbacher at Sanofi.

Valuation The valuation has long been attractive in absolute terms but reflects poor R&D productivity and growth perspectives so that the PEG is usually in negative territory. Now, should mid-term financials be too conservative and new management be convincing enough to drive consensus up, then AstraZeneca would undoubtedly start a recovery and close at least part of the gap vs peers in EV/EBIT or P/E. Double-digit FCF yields and a 6% dividend yield are also supportive of a positive performance.

Catalysts Obviously the full-year meeting on 31 January 2013 is by far the first trigger for the stock and the investment case. However, beyond that, 2013 is also an important year for products like Crestor and Brilinta which are expected to reassure and for Amylin to show that it was worth the price paid. We are also expecting R&D to report fresh clinical data and molecules to move into phase III thus warranting a closer look and potential higher value.

Difference from consensus First of all, we do not give up on Brilinta unlike most of our peers and we still think it can become a multi-billion drug. This could significantly impact both revenues and profits. Second, we think that a change in status is possible which would drive the share price well above the current level and so P/E expansion is a realistic target provided that Pascal Soriot successfully introduces his new strategy.

Risks to our investment case Obviously AstraZeneca is not a free lunch. Nothing is granted at this stage. But realistically we think the downside is very limited. Risk number 1 is Pascal Soriot missing the meeting point on 31 January 2013. Should the meeting be a non-event or lack substance, we doubt the stock would be in a position to perform in the short-term. Another risk could be a major and not-well understood acquisition.

AstraZeneca

5

2. When communication matters more than everything else

2.1. D-Day is on 31 January 2013 The purpose of this report is to make a re-evaluation of the investment case ahead of Pascal Soriot’s first speech on strategy which is due to take place on 31 January 2013 at the same time as the group presents its 2012 full-year results.

As a new CEO is introduced, a new chapter opens. This is the usual case for all companies in a similar context, although it is fair to say that depending on conditions it may have more or less of an impact on the share price. When Andrew Witty took over JP Garnier as CEO at GSK, it was the final stage of a well-prepared process that did not come as a surprise to the market community, even though introductory comments by Andrew Witty were nevertheless well received by the Street. The same happened when Severin Schwan became CEO at Roche which made even less of an impact as the strategy was a pure continuum of the pre-existing state of affairs.

Obviously the present case at AstraZeneca looks more similar to the previous one at Sanofi. David Brennan left, whereas Gerard Le Fur was asked to leave by the Board, but in the end both moves reflected failures in terms of strategy. So expectations here are likely to be higher.

Although one man, be it the CEO, cannot change a company by himself after only a speech, there is no doubt he can bring confidence back to a stock and a story. And this is enough to climb the first step. As time goes by, and with first deliveries and increasing confidence inside and outside the company around the new strategy, then a re-rating can take place.

2.2. Consensus expectations are undemanding

2.2.1. First comparisons can be made with existing guidance 2015 mid-term guidance, which is still running, has two very different read-outs for investors. This reflects how the community judges the respective objectives. On one hand revenues should stand between USD28bn and USD34bn, while on the other the core operating margin should be in the range of 48% to 52% pre-R&D costs.

A new chapter opens

AstraZeneca

6

Fig. 1: How consensus moved on revenues

Sources: AstraZeneca, Bryan Garnier & Co.

Over the last couple of years, consensus has continuously cut revenue expectations for the group. It is fair to say to the trend has been consistent with the company’s own cut in one of its secondary guidances, i.e. a risk-adjusted sales contribution from new products, brought down from USD4-6bn originally to USD2-4bn in early 2012 in light of various disappointments and delays, including for TC-5214 and dapagliflozin and a slower-than-expected ramp-up for Brilinta in the US. This is also in line with the most recent quarterly performances in 2012 which showed lower-than-expected revenue growth not only because of healthcare reforms, price pressures and generic impacts but also because of a specific-to-AstraZeneca bad performance in the emerging markets.

Whatever the reason, the endpoint of the trend as shown on the chart above is that consensus is now considerably adjusted but in absolute terms cautious and well below the guidance of the group, as consensus 2015 revenues are between USD26bn and USD27bn when the company guides for a range of USD28-34bn.

We will address later on in this report the reservoirs of growth and upside at the top-line level for Pascal Soriot but it is reasonable to expect that no further cut will be needed from where the consensus is today.

As far as core pre-R&D operating margin and FCF yields are concerned there is less of a worry in our view. Although it was more difficult in the early part of 2012 when too many adverse revenue impacts led to an EPS downward revision, leading to the departure of David Brennan as CEO, AstraZeneca has always managed its cost structure in an efficient manner so that in the end the lack of top-line dynamism was offset by productivity initiatives and cost-cuttings to preserve earnings and cash-flows. That is why AstraZeneca remained in recent years as one of the most profitable pharmaceutical companies offering one of the highest FCF yields in the industry and also one of the highest returns to shareholders with a mix of dividends, share buy-backs and sometimes share price performance (even in 2012, AstraZeneca was the best performer amongst the UK names).

Consensus is below the bottom of the guidance range for revenues

AstraZeneca

7

2.2.2. Share buy-back programme was recently frozen Another reason not to be afraid about market reaction is that Pascal Soriot preventively froze the share buy-back programme on his first day as CEO. As a consequence, here also, consensus was able to adjust expectations on the downside although it is uncertain whether this is transitional or more structural.

Pascal Soriot explained the decision to suspend the repurchase programme with the following sentence: “As I assume my responsibilities at AstraZeneca, I believe this is a prudent step that maintains flexibility while the Board and I complete the company’s ongoing annual strategy update”. As it was even more clearly stated during the conference call that took place in late October when presenting the Q3 results, the new CEO is not against share buy-backs in principle but wants to retain some flexibility potentially for other purposes like M&A activities.

As shown in the table below, consensus adjusted its expectations for 2012 as well as for subsequent years. However share buy-backs have not been removed but just reduced in size to around USD2.5bn per annum.

AstraZeneca is generating around USD10bn in annual cash flows out of which USD1bn goes into capex and USD3.5-4bn into dividends. Now what is going to be interesting to hear about is how Pascal Soriot together with the Board confirm or change the priorities set for cash-flow reinvestment: internal and external R&D is likely to be prioritised (will any commitment to a percentage be made considering that the previous management was guiding towards a 40-50% range). As for the residual cash flow, the order of priority was: 1) specific business needs; 2) debt repayment; 3) progressive dividend policy; and 4) share repurchases.

As we consider possible options for the new CEO, we assume that residual cash flow is likely to be directed towards M&A activities first, whereas a progressive dividend policy is likely to be confirmed. Debt repayment is no longer relevant as gearing is very low even after the Amylin co-financed acquisition and the cost of debt is low and attractive.

One open question that may have a negative influence on EPS, and EPS growth in 2013 more specifically, is whether AstraZeneca will or will not commit to any share buy-back programme in 2013 when giving the annual guidance. It is far from certain (because perhaps too early) that new management will commit to any programme for 2013. Many opportunities are more likely to be given priority over a share buy-back programme in our view.

Fig. 2: Assumptions about share buy-backs (m) 2012 2013e 2014e 2015e

post-Q2 pre-Q3 diff. post-Q2 pre-Q3 diff. post-Q2 pre-Q3 diff. post-Q2 pre-Q3 diff.

Net SBB as

reported in cash-

flow statement

4 454 2 939 -34% 3 151 2 520 -20% 2 690 2 347 -13% 2 645 2 352 -11%

Weighted average

no. of shares used

to calculate EPS

1 249 1 267 1% 1 182 1 223 3% 1 136 1 191 5% 1 094 1 161 6%

Source: Company Data ests.

Since share buy-back was frozen, consensus adjusted accordingly

AstraZeneca

8

2.2.3. R&D pipeline update is likely, with potential cuts AstraZeneca unfortunately has a long-lasting history of R&D weakness. The whole pharmaceutical industry went through a deep crisis in terms of R&D delivery output during the last decade but for most of them significant changes were implemented in terms of infrastructure, asset allocation, ROI calculations, prioritisation, internal vs external spending, therapeutic focus etc… AstraZeneca is said to have participated in the same reassessment and reshuffling as others (in January 2010, the R&D function announced a transformational change programme with a reduced number of disease areas of focus, an increased investment in others like predictive science and personalised healthcare, the closure of sites), but with little if any consequence.

If we look at AstraZeneca’s presentation from June 2010, the company wrote about “filling [our] late-stage pipeline with new opportunities” and about “late-stage portfolio [that] is maturing”. But the company never delivered on its promises:

- The most striking failure was that of the Oncology franchise where AstraZeneca used to have some expertise. Several highly promising compounds failed to show a benefit in trials, including Recentin (with colorectal as the lead indication), Zactima (with lung as the lead indication), zibotentan (with prostate as the lead indication) or olaparib (with ovary as the lead indication). Only Caprelsa proceeded to market although only in the narrowed indication of medullary thyroid carcinoma.

- Another big hit was the failure of a drug that could have prolonged AstraZeneca’s expertise in CNS, i.e. the in-licensed TC-5214 from Targacept whose first indication (major depressive disorder) failed to show any benefit in phase III trials.

- Lastly, among others, Certriad filed in 2009 was withdrawn, motavizumab was written off, dapagliflozin was delayed until it recently got the positive recommendation from the CHMP in Europe whereas Crestor failed to show superiority over Lipitor in the JUPITER trial.

All this explains why consensus repeatedly reduced its expectations about pipeline delivery and revenue contribution from new products.

Now we see a contribution from not-yet-marketed products in the consensus numbers in 2017 of around USD1.5bn (adjusted) or USD2bn (non-adjusted). This has to be compared with annual revenue expectations for the same year of USD25bn, thus representing 6%. Among these references, the three biggest contributors are Zinforo (approved by the EU in late August 2012), Forxiga (approved by the EU in mid-November 2012) and MEDI-3250, a quadrivalent flu vaccine with little risk of failure.

To make it short, we see little or no downside risk to the consensus numbers should Pascal Soriot decide to make a full review of the pipeline with potential cuts in the end. To be more accurate, the only single drug we are not comfortable with and which has no value in our model but a USD200-300m value for the consensus is fostamatinib.

On 15 November 2012, AstraZeneca held a conference call which focused on fostamatinib, a compound in-licensed from Rigel whose first targeted indication is rheumatoid arthritis (RA).

In R&D, AstraZeneca did not deliver on promises

Consensus expectations for R&D output are low too

Fostamatinib could have been an issue

AstraZeneca

9

RA is a lucrative market for drugs and biologicals in particular which is worth USD14bn according to AstraZeneca with the potential to reach USD18bn by 2022. However it is also a fairly crowded market with various therapeutic options from the old and now genericised standard methotrexate to the well-adopted anti-TNF class which includes Enbrel, Remicade and Humira and more recent alternatives such as Orencia and Actemra, until the recently approved and the not yet launched Xeljanz (tofacitinib) in the JAK family. The bar is high.

From what AstraZeneca presented during the November conference call in terms of phase II data, the probability of success looks thin to us. In our view there are two main limitations: first is obviously safety, as fostamatinib shares with other compounds targeting RA increased incidence of respiratory-tract infections, neutropenias and transaminase elevations but it is also adding an unusual one which is an increase in high blood pressure (29% vs 17%) and this is worrying. Exclusion of patients with cv disease cannot be the only answer and so phase III data will be closely monitored from that perspective. The second concern is the failure of TASKI-3 which suggests that the syk pathway overlaps TNF-mediated inflammation. So fostamatinib will have to be positioned upfront, which requires a very good safety profile.

On 13 December 2012, AstraZeneca reported the top-line results from the OSKIRA-4 phase IIb trial studying fostamatinib in monotherapy over 24 weeks (280 patients) in DMARD non-users, inadequate responders or intolerant patients. Three dose regimens of fostamatinib were tested and compared to adalimumab (Humira) and placebo. Two co-primary endpoints were assessed to the trial: superiority to placebo at week 6 and non-inferiority to Humira at week 24 measured on DAS28 score. Two out of the three regimens proved superior to placebo but none of the three achieved the second primary endpoint and all were inferior to Humira. The market reacted very negatively on the news and it is fair to expect the drug to now be further discounted.

The OSKIRA phase III programme is expected to report sometime in H1 2013. None of the phase III is head-to-head which could represent another hurdle for regulatory filings which are projected to take place in H2 2013.

2.3. Sanofi not a benchmark but an interesting proxy anyway

2.3.1. Some interesting lessons to learn from Sanofi’s experience Even before Chris Viehbacher joined Sanofi as a CEO in late 2008, he made a comprehensive review of the personnel in various places around the world but also of the key shareholders to get their thoughts about what was good and considered as strengths for the company and what had to be changed or improved. Pascal Soriot is apparently doing the same thing at AstraZeneca since he arrived.

Considering the chart below, which shows how Sanofi’s share price behaved, it is clear that everything turned positive in mid-2009.

Since last December, we can expect fostamatinib to have been discounted

At Sanofi, recovery also started with a new CEO

AstraZeneca

10

Fig. 3: Sanofi: how the share price reacted when Viehbacher first spoke

Source: Bryan Garnier & Co

What happened then? Chris Viehbacher made his first general speech in connection with the full-year results presentation on 11 February 2009 and remained vague but clearly said that a roadmap would be presented on 29 July. Indeed on that day, after the half-year results, a central part of the presentation was called “Update on transforming”. Several key messages were issued:

1) “our aim is to achieve at least the same level of sales in 2013 vs 2008 before any significant external growth opportunities”;

2) “creation of two global BU’s for diabetes and oncology”; 3) “planned initiatives will lead to annual cost savings of €2.0bn for 2013 vs 2008 at CER”; 4) “efficiency savings and business growth aim to offset impact of genericisation on adjusted

net income in 2013”.

Why was a message guiding for stable sales and profits over a 5-year period so positive for the stock? Simply because at that time the market was expecting EPS to decline by 7 to 8%. And so the message was a first opportunity to revise expectations upwards.

In our view, AstraZeneca could be in a similar situation as a new CEO is joining. Since Pascal Soriot announced that the share buy-back programme would be put on hold to keep full flexibility for strategic opportunities and until a review is performed, consensus further adjusted EPS estimates downwards and is now looking for a cumulative EPS decline of 12% between 2012 and 2016.

Fig. 4: Where consensus stands USDm 31/12/11 31/12/12e 31/12/13e 31/12/14e 31/12/15e 31/12/16e

Sales 33 591 28 090 27 280 26 550 26 113 25 415

% change -16.4% -2.9% -2.7% -1.6% -2.7%

EPS (USD) 7.28 6.24 5.75 5.58 5.70 5.49

% change -14.3% -7.9% -3.0% 2.2% -3.7%

Source: IBES

35

40

45

50

55

60

65

70

75

12/06 04/07 08/07 12/07 04/08 08/08 12/08 04/09 08/09 12/09

Core EPS is expected to decline by 12% by 2016

AstraZeneca

11

Should Pascal Soriot commit to at least stable EPS over the same period then the share price is likely to react in a similar way to Sanofi’s in 2009. Should AstraZeneca show a worst case with a stable bottom-line then some investors would probably accept to reduce the discount to peers to capture potential leverage under any other scenario.

2.3.2. However it is not fully comparable However, although there are potential similarities, AstraZeneca is not Sanofi. In particular, pure players like diversified healthcare companies have pros and cons and each category has advantages and drawbacks, but comparing the two is a difficult exercise. When facing patent expiries, Sanofi called for resilience and visibility in its non-pharmaceutical businesses, but AstraZeneca will not be able to use the same weapons.

Not only will Pascal Soriot be prevented from using Vaccines, Generics, Consumer Healthcare or Animal Healthcare as growth platforms but each and every pure player is intrinsically more innovation-dependent. And in this specific case, R&D delivery or inability to deliver is precisely a cause for concern. And he will not be in a position to fix it.

Nevertheless it is our belief that investors are not expecting a new Roche to emerge from the meeting but only the first chapter in a new story. As long as the objective is not more ambitious, there is a significant chance that it can be achieved.

Stable EPS would be good news

AstraZeneca

12

3. The communication will likely use the “growth platforms” terminology

3.1. A common wording now in pharmaceuticals

Although pharmaceutical companies have very different structures and strategies, there is a common interest in approaching their future through growth platforms, i.e. areas that represent the key pieces from which they can extract growth going forward.

Growth is what major drug companies have been desperately looking for over the last decade. After the golden age of the ’90s, the industry worked hard to revive growth once it realised that prices wouldn’t go up at the same pace as they used to and that innovation would be harder to come through.

However, including in a much more severe environment, and because the business is changing, there are obviously areas that carry much residual potential for growth.

From a geographical perspective, there are two regions in the world that remain very attractive for this industry: first is the US as it is still the country where innovation is the more rapidly and the more highly rewarded and, although it is tough to go through a patent cliff there, as long as one innovates one will get a reward; the second is obviously emerging markets which represent as much as 70% of worldwide growth and while it is usually slightly dilutive to earnings and margins, it is where volume growth stands. There is no future for any big pharmaceutical company if it does not operate successfully in the emerging markets.

Beyond emerging markets there is no single answer to the question of growth and each company will have its own reply. As far as therapeutic areas are concerned, oncology is frequently presented as a growth driver because there is much more to do to achieve remission or even to cure cancer, diabetes is also an area in focus as it drives significant growth in all regions as it becomes pandemic, and rare diseases also attract interest as, although the market size is small in volumes, prices are very high, competition is limited and marketing support almost nil.

Outside prescription drugs, each company has its own reading about the market needs but there are two main objectives when it comes to diversifying: first is to get synergies with the core business as can be the case with molecular diagnostics, OTC products, generics or vaccines; second is to de-risk the traditional patent-dependent drug business as can be the case with Ophthalmics or Animal Health.

What Pascal Soriot said about the topic during the Q3 conference call is that the group will not do generics or OTC products but also that it is not against diversifying within focus, i.e. in areas where innovation matters and which are synergistic with pharmaceuticals.

We also noted during the same call that Pascal Soriot was referring to growth platforms, even mentioning Brilinta, diabetes and emerging markets as belonging to them, Japan and biologics too but at a later stage. And it is our belief that this will be the spinal column of his speech on 31 January 2013.

AstraZeneca: still focused, with growth platforms to be defined

AstraZeneca

13

3.2. Diabetes is likely to be a focus as the agreement with BMS dramatically changed in 2012

3.2.1. Onglyza is gaining ground in the US and will benefit from the fixed-dose combination with metformin everywhere

The DPP-IV family very opportunistically entered the diabetes market at the end of the previous decade as it came at a time when physicians were eagerly awaiting new therapeutic options to treat type II diabetes. All the more so that a rapidly growing family saw its growth suddenly interrupted by regulators for safety reasons, i.e. the PPARg agonists rosiglitazone (Avandia, GSK) suspected of cardiotoxicity and pioglitazone (Actos, Takeda) blamed for an increased incidence in bladder cancer were both either restricted in their use or withdrawn from certain markets.

Although efficacy results with DPP-IV inhibitors were not outstanding, the benefit-risk ratio appeared significantly positive as the side-effect profile was clean and the influence usually more or less neutral on weight. As a consequence, the first members of the family very quickly achieved high revenue milestones. First-to-market and still market leader is Merck’s sitagliptin whose total sales are likely to reach USD5.5bn in 2012, of which the combination with metformin around 30%.

There are two main competitors to Merck’s sitagliptin. Novartis’s vildagliptin (Galvus, Eucreas in combination with metformin) was second-to-market in ex-US territories but was prevented from entering the US market by the FDA which asked for additional trials that Novartis found irrelevant to conduct. And so here is the main opportunity for BMS and AstraZeneca which joined their forces to develop and market saxagliptin (Onglyza) worldwide and therefore there is little surprise to see that the US market represents 72% of the reported sales for the drug (9-month figures in 2012), with a similar proportion of monotherapy and combination to Januvia-Janumet. Not only did BMS and AstraZeneca benefit from a second-to-market status in the US and from a higher price than anywhere else, but marketing in Europe was also handicapped by technical manufacturing issues that prevented the twice-daily combination product Komboglyze from being launched. This should take place in 2013.

It is fair to remind that AstraZeneca is booking as revenues 50% of the gross profit generated by the product family. Over the first 9 months of 2012, the company reported USD235m for the Onglyza family or 46% of the USD511m total sales reported by BMS, suggesting a 92% gross margin.

As we enter 2013, we expect the drug to sustain the current 40%+ annual growth rates ex-currencies in the US and to benefit from the fixed-dose combination launch in Europe as well as from an increased global powerhouse in the diabetes field with Forxiga and Bydureon also promoted to the same specialists and sometimes generating positive synergies. So we expect Onglyza to generate USD1bn in revenues for AstraZeneca in 2019, which is a touch above market expectations.

3.2.2. Forxiga has been unexpectedly approved in Europe and the challenge is now on the commercial side

When the deal was inked between the two companies, first-in-class SGLT-2 inhibitor dapagliflozin had still to show convincing clinical data to support regulatory filing and marketability of the drug.

Onglyza can reach USD1bn for AstraZeneca in 2019

AstraZeneca

14

With no doubt the mechanism of action was of great interest to the medical community. To make it simple, SGLT-2 inhibition was a very innovative pathway to address type II diabetes as for the first time the point was neither to promote insulin secretion nor to fight against insulin resistance but to excrete glucose in excess from the body.

However the mechanism of action per se was the heart of the problem too as glucose in excess was excreted through the urine. There were two key elements of criticism: The first is that glucose in the urine is usually the sign of something going wrong, so how can it be distinguished between normal action of the drug and a sign of an underlying disease? The second issue was directly extracted from the clinical trials as statistically significant increases in urinary-tract and genital infections were observed whereas a suspicion of tumour promotion also participated in the negative opinion from the ODAC in the US and the long delay between the CHMP opinion and the final approval in Europe.

But in the end, this is what really matters: Forxiga obtained its first regulatory approval from a significant agency and the drug is currently being launched in Europe and will be throughout 2013 as pricing procedures are completed.

Fig. 5: Advertisement on the internet about Forxiga

Source: Internet; Bryan, Garnier & Co.

What remains to be seen is how such a drug can ramp up as the great interest for its action (not only on HbA1c by the way, which is at least equivalent to that of DPP-IV inhibitors, but also on weight and on blood pressure) is somewhat dampened by an increased risk of infections.

We are cautiously assuming that Forxiga, as reported in AstraZeneca’s accounts (i.e. in a similar way as Onglyza is) can achieve USD500m in revenues or half the level of Onglyza, as of 2018. This assumes a new filing in the US in 2013 and approval and launch sometime in 2014. This takes into consideration the upcoming competition within the same class from J&J’s canagliflozin (filed in May 2012 and which might be first in the US if the FDA does not block it as it did previously with dapagliflozin, despite positive AdCom vote in January) and Lilly/BI’s empagliflozin which is expected to be filed in 2013. This forecast once again is slightly ahead of consensus expectations.

3.2.3. The acquisition of Amylin adds GLP-1 assets to the portfolio On 30 June 2012, AstraZeneca and BMS together announced their intention to acquire Amylin Pharmaceuticals for a total consideration of USD7bn. The deal materialised a few weeks later and the acquisition was completed on 10 August. AstraZeneca paid BMS USD3.4bn and an additional USD135m to acquire equal governance rights over strategic and financial decisions. Several other companies were invited to make an offer to acquire Amylin but most considered the price finally paid as too high (the usual argument however for those that fail in battle).

Forxiga will be first ex-US but late in the US

AstraZeneca

15

It makes a lot of sense for a leader in the field of diabetes to have a GLP-1 product line as it is and will remain for the short- and medium-term future one of the fastest growing segments of this market. During the conference call supporting the announcement of the acquisition, AstraZeneca quoted external sources expecting the GLP-1 market to grow from USD1.5bn in 2011 to USD8bn in 2020. So it is obviously very tempting to try to capture part of this pie.

Now is Amylin the right target? Well actually we are not sure that there was any other available target but, in absolute terms, there are reasons to believe that Bydureon is not the perfect drug. A more interesting question is probably whether the life-cycle management of the drug (dual-chamber pen, weekly and then monthly suspension) can improve it and make it one of the winners in the category.

Even though we are far from certain it is going to be the case, we also believe that being first to market in a segment like GLP-1 will remain a key advantage, although Novo-Nordisk took over Byetta as the market leader in a bit more than a year. For at least another year, Bydureon will remain the only available once-weekly GLP-1 in the market place and the second to enter (supposedly GSK’s albiglutide) is not really frightening (if only because it failed to show non-inferiority to Victoza too). With more marketing strength behind it, it is fair to expect Bydureon to enjoy fast growth in the US – as weekly prescriptions seem to support the thesis – and to a lesser extent in other territories as well across 2013 when the alliance will recapture the rights from Lilly. AstraZeneca made it clear during the presentation that a significant part of the value that derives from the acquisition will come from Europe and ROW where the opportunity is sizeable and much will be achieved compared to what Amylin could have done as a stand-alone company. At this point, it is interesting to mention that Bydureon was approved in Japan and is currently being launched there.

Although it is difficult to challenge the USD8bn expectation for the GLP-1 market in 2020 that AstraZeneca mentioned during its call, it is fair to say that this market segment is more than likely one that should be one of the fastest growing segments in the field of diabetes. If only because many additional compounds will join the battle and help enlarge the market among which dulaglutide (Lilly/BI) and semaglutide (Novo-Nordisk) appear to be the most promising opportunities, with the objective to have the advantage of a weekly formulation together with at least an equivalence of efficacy compared to daily GLP-1s. Depending on whether they are both successful with this objective, and considering that they are supported by leaders in the field of diabetes, Bydureon might find itself more difficult to perform durably in the decade.

As we consider what the consensus is factoring into its revenue model for the coming years, we do not see any material (if any) upside to the GLP-1 franchise as cumulative sales are totalling around USD800m for AstraZeneca which, assuming an 80% gross margin for the drugs, would represent global sales of USD2bn or a 25% market share for the companies, which is fair but not really conservative. We would even question if some have not forgotten how the deal is structured, i.e. AstraZeneca is booking 50% of the gross margin as sales. We have a USD600m forecast for the same year.

A head start with Bydureon in the weekly GLP1 class

However it is likely to be severely challenged by future launches

AstraZeneca

16

Fig. 6: Prescription chart shows strong momentum since AZN/BMS promoted Bydureon but starting point was low

Source: Bloomberg.

3.3. Soriot considers it is possible to do much better with Brilinta

3.3.1. As a reminder, clinical data were striking although a second look raised questions

Fig. 7: PLATO primary endpoint results as reported in the NEJM

Source: New England Journal of Medicine (NEJM) 361;11

AstraZeneca

17

In the PLATO phase III trial, ticagrelor (180 mg loading dose and then 90 mg twice daily) was compared to clopidogrel (300-600 mg loading dose and then 75 mg once daily) for the prevention of cardiovascular events in 18,624 patients suffering from acute coronary syndrome (ACS) with or without ST-segment elevation. The primary endpoint was a composite of death from cardiovascular cause, myocardial infarction or stroke at 12 months and occurred in 9.8% of patients receiving ticagrelor vs 11.7% of those receiving clopidogrel thus showing a statistically significant benefit with a hazard ratio of 0.84 and a p-value < 0.001. The day when AstraZeneca announced positive headline results, i.e. on 11 May 2009, the share price jumped by 5.5%.

However it is fair to say that full results unveiled at the ESC congress on 30 August 2009 and included on the same day in an online edition of the NEJM raised questions. The trickiest one with no doubt related to the representativeness of the results for the US cohort of the study. Here is what the NEJM wrote: “The difference in results between patients enrolled in North America and those enrolled elsewhere raises the questions of whether geographic differences between populations of patients or practice patterns influenced the effects of the randomized treatments, although no apparent explanations have been found”.

And so it did not come as a surprise, later on, to see ticagrelor’s regulatory process in the US taking longer than expected with a mixed vote from the FDA panellists and then further delays in the FDA final decision.

This long-lasting review and the questions raised likely cast doubts about the drug itself and unfairly more than offset the somewhat outstanding results that showed superiority over standard of care (clopidogrel, Plavix). Now the regulatory process is well behind us all around the world whereas clinical data are intact and valid in the ACS indication. We will see below that AstraZeneca has an ambitious and comprehensive programme ongoing to develop ticagrelor well beyond ACS.

3.3.2. But formulary access and reimbursement is a challenge Actually, AstraZeneca came from one challenge to the next with ticagrelor and approval, even in the US, was not the end of the troubles with the drug. In the old times of pharma, a drug like Brilinta that shows a 16% risk reduction in major CV events compared to standard of care would have had taken over the old standard fairly quickly.

Unfortunately, this is not what happened and reported sales are still lagging well behind initial expectations. As illustrated in Fig.8, the consensus consistently revised its sales estimates for Brilinta downwards, in the end by around USD1bn between the end of 2010 and the end of 2012.

A 16% risk reduction compared to Plavix

The launch in the US was a failure

AstraZeneca

18

Fig. 8: A continuous downward trend in 2014 Brilinta sales estimates

Source: Consensus AstraZeneca; Bryan, Garnier & Co.

Sales for Brilinta are so weak that it is far from certain that the drug will reach the USD100m mark in 2012 although having reported USD51m for the first-half. The US part is particularly mysterious as USD11m of inventories were booked in Q3 2011 but since then the drug only reported USD10m in total for the following four quarters. At the same time, in July and again in October, AstraZeneca reported “steady progress in terms of formulary access, protocol adoption and product trial rates by interventional cardiologists”.

This question about drug access is intriguing, all the more so if we also consider the press release issued on 4 December 2012 by AstraZeneca. More than a year after its launch it looks like the company realised that the drug had limited availability in the market which prevented it from normal deliveries at the pharmacy level, i.e. after prescription. It is good to see that AstraZeneca is fixing the issue but hard to understand why it did not do this before. Why did they ink an agreement with 26,000 pharmacies around the US to ensure the right inventories for the drug only in December 2012?

Now if we consider the glass is half-full then we can stress that a high level of formulary access (>80% of the top 400 hospitals) together with an unrestricted access for around 70% of covered lives can more easily translate into higher reported sales with the expanded availability of the drug at the pharmacy level.

3.3.3. Ramp-up was disappointing but potential remains intact Now the clinical data set is intact and clearer now than it was two years ago, the formulary access of the drug is rather good although it could be further improved and the availability of the drug at the pharmacy was an issue that is now being fixed.

So if we consider the TRx level for the third quarter, i.e. 33,829 prescriptions, up 55% sequentially from the previous quarter and apply a 20% discount to the WAC daily price of USD7.24, this would represent an annual sales contribution of USD71m whereas the drug so far totalled only USD10m in the US in 2012.

0

200

400

600

800

1000

1200

1400

1600

1800

Pre Q1

Post Q1

Pre Q2

Post Q2

Pre Q3

Post Q3

Pre Q4

Pre Q1

Post Q1

Pre Q2

Pre Q3

Post Q3

Pre Q4

Post Q4

Pre Q1

Post Q2

Pre Q3

Post Q3

Brilinta

AstraZeneca recently took measures to improve access to the drug

Prescription trend is improving in the US whereas ex-US launch is encouraging

AstraZeneca

19

Fig. 9: US Sales do not reflect the prescription trend

Source: IMS, AstraZeneca.

To make such a product a big commercial success, as was the case with Plavix, not only will it need to expand its indications (to read below) but also to make sure that the prescription is not restricted to hospital-only use and is continued by GPs once the patient is back home.

Fig. 10: Two significant studies are running with Brilinta Study Indication # pts Comp. arm Timing

PEGASUS-TIMI 54 LT treatment of secondary prevention of thrombotic

events in post-MI patients

21,000 90mg vs 60mg

vs pbo (+ aspirin)

Q1 2014

EUCLID Treatment of patients with peripheral arterial disease

(PAD) and above 50

11,500 90mg vs 75mg

clopidogrel

Q1 2016

Source: Company Data; clinicaltrials.gov, Bryan, Garnier & Co. ests.

It is worth keeping in mind that Plavix (clopidogrel) reached an all-time sales high in 2011 of USD9.65bn despite generic competition in Europe. With a superiority claim over it obtained in PLATO and a premium price, Brilinta is an obvious candidate to achieve a multi-blockbuster status despite clopidogrel generics which will prevent full penetration and substitution to the new and more effective drug for cost purposes.

We strongly believe that there is an organisational issue with Brilinta in the US as the split in sales, although too early in the history to drive definitive conclusions, is too different from what it was with Plavix. And so this is likely to be fixed, as Soriot is desperately looking for growth drivers. With little doubt, Brilinta is at the top of the list of assets with rapid potential upside.

AstraZeneca

20

Fig. 11: Comparison of sales split between Brilinta in Q3 2012 (left) and Plavix in 2011 (right)

Source: Bryan, Garnier & Co. ests, AstraZeneca, Sanofi

Even though we are not considering Plavix but Effient (prasugrel, Lilly) as a comparator, since Plavix was introduced so long ago, i.e. in a too different environment to be relevant, we note a good and similar uptake in ex-US territories but we confirm a strange profile as far as the US uptake is concerned. Thus we are inclined to think that Brilinta’s launch in the US by AstraZeneca was a failure. The US remains a key market for antiplatelet agents and Brilinta so far has not done well there. As a reference, we estimate that Effient will achieve USD450-460m in sales in 2012, of which 75% is in the US.

Looking at detail at the respective prescribing information documents of the two drugs in the US, there is actually a suggestion of some kind of superiority of Brilinta over Effient. Although the two carry black box warnings for bleeding risks, only Brilinta is reported as superior to clopidogrel and, more importantly, the target population is much wider as Brilinta is indicated for patients with ACS whereas Effient’s use is limited to a sub-population, i.e. those having ACS who are managed with PCI (angioplasty). Moreover if bleedings are reported for both, only Effient carries a warning about “life-threatening and fatal bleeding”.

Fig. 12: Comparative trends in Effient and Brilinta’s revenues

Sources: AstraZeneca, Lilly

Germany29%

Other W. Europe

34%

US29%

Rest of world8%

0

10

20

30

40

50

60

70

80

90

100

Effient US

Effient ex-US

Brilinta US

Brilinta ex-US

There is NO reason for Brilinta not to exceed Effient

AstraZeneca

21

Fig. 13: Comparative ramp-ups of Effient and Brilinta in the US

Sources: AstraZeneca, Lilly

Our understanding is that uptake in France (launched in July 2012) is good and therefore launches in big European countries (Germany, Italy) are all successful. So the issue with Brilinta is really US-related. As we see improving trends in both prescriptions, coverage and availability, we believe that upcoming quarters should reflect progress with stronger reported figures. The consensus is currently expecting Brilinta to achieve USD480m in 2014, i.e. in year 4 after launch or a similar level as Effient at the same stage, which is in our view too pessimistic considering the clear superiority of Brilinta over Effient which in the end will prevail as always when a mortality benefit is established.

3.4. Emerging markets is a natural call

3.4.1. AstraZeneca is lagging behind its peers There is no exception to the statement that emerging markets are growth platforms and growth drivers for all players in the pharmaceutical space. And so there is absolutely no question as to whether emerging markets will belong to the list that Pascal Soriot will present to the investment community as carrying potential upside to the company’s top line: they will!

However this is also another curiously moving piece within AstraZeneca compared to other pharmaceutical companies and to illustrate this strange pattern we would simply mention a couple of figures. Like others in the industry, AstraZeneca has dramatically increased its level of investments in manufacturing and commercial operations in the emerging world. Over the last 10 years, the sales and marketing workforce composition for instance has moved from an 84%/16% split in favour of the established markets to a 53%/47% split in favour of the emerging markets. In other words, AstraZeneca today has almost as many people working for the commercial and marketing division in emerging markets as in established markets which both reflects an absolute reduction in sales forces in developed markets such as the US and Europe and a significant increase in the emerging countries.

0

10

20

30

40

50

60

70

80

90

100

M1 M2 M3 M4 M5 M6 M7 M8 M9 M10 M11 M12 M13 M14

Effient US

Brilinta US

A clear reallocation of resources in favour of emerging markets

AstraZeneca

22

Despite this meaningful increase in spending in the emerging markets, we have seen no change in the global geographical split for the company in recent years. Emerging markets represented 14% of AstraZeneca’s sales in 2008 and their weight only climbed to 17% in 2011, well below the level reached by all its European peers. And if the ratio is going to jump in 2012 to over 20%, this will be the combination of two parameters: first the sharp decline in revenues from blockbusters like Seroquel in the US or Nexium in Europe which mechanistically favours other markets; second the divestment of AstraTech which removes a US-only business from the portfolio. So nothing like an accelerating trend is noted in the emerging markets where AstraZeneca is far too dependent upon a small number of markets like China (USD1,261m in 2011, 22% of emerging markets sales). Over the first 9 months of 2012, AstraZeneca grew only 3% in emerging markets.

Fig. 14: Comparative split between M&D workforce (left) and sales (right) - 2011

Source: Company Data

So AstraZeneca has a fairly large infrastructure in emerging countries, although this is highly concentrated in BRIC markets. In 2011, the company announced two additional significant investments in manufacturing plants for respectively USD150m in Russia and USD200m in China. The commitment towards emerging markets is not in question, although it can be argued whether it comes a bit late. Similarly, AstraZeneca’s interest in generic companies to help further penetrate some of these emerging markets where it is a “must-have” may have materialised too late too. This may well explain, at least in part, why AstraZeneca is more successful in China than anywhere else (agreement with Torrent in 2010, acquisition of Guangdong BeiKang in 2011).

As far as China is concerned in the short term, the over-proportional exposure of AstraZeneca in China where the company is number 2 will not necessarily be good news for 2013 since the National Development and Reform Commission announced earlier this month an across-the-board price cut of 15% on average for around 400 medicines in 20 classes. This will affect Pulmicort, Seroquel and more importantly Crestor and will therefore significantly dent growth in China for the current year.

Now Pascal Soriot is said to have been instrumental in Roche’s growing footprint in the emerging world and so there is no reason to believe that he will not act in a similar way at AstraZeneca where it is probably even more strategic as long as the R&D pipeline is not in a good position to deliver and as long as the patent cliff is not over (which at AstraZeneca only happens in 2016). The real question is the time from inception of a new strategy to its first deliveries.

Emerging markets

47%Established markets

53%

Emerging markets

17%

Established markets

83%

AstraZeneca is lagging behind peers in emerging markets, except in China

Price cuts in China will impact 2013

AstraZeneca

23

3.4.2. Pure players vs diversified Obviously all players do not have the same arguments with reference to emerging markets. Beyond the history that each company has in the Southern Hemisphere that really matters, because the older the presence and the better the knowledge of how each market works, the composition of the portfolio of each company is another element that makes a difference in our view among the various players.

Be diversified helps. There is little doubt that emerging markets are a good place to produce synergies between the different businesses of a diversified healthcare company. We addressed briefly the point with generics but this is not the only example. Obviously emerging markets are facing issues with access to medicine as healthcare costs are often too high for the majority of the population in those countries. Generics (which sometimes include branded generics) are a good solution to deal with access to healthcare for low-income people. Like others, AstraZeneca understands that it needs generics to be successful in emerging countries, although we are not sure that this has been implemented in all countries where it makes sense, i.e. beyond China.

If another healthcare segment is strategic in the Southern Hemisphere, then this is certainly Vaccines and for many reasons. First of all because there is a need: prevalence of infectious diseases is as high as in the North and for some of them even markedly superior, such as viruses transmitted by mosquitoes, e.g. West Nile, yellow fever or dengue, but also diseases involving rotavirus with elevated mortality in infants. Another category of vaccines is key for emerging markets, namely paediatric vaccines just because birth cohorts are much larger than in developed countries. The largest players in the field of vaccines have noticed an increasing role of vaccines in the relationships they have with healthcare authorities. Because production is limited, each individual country negotiates to have a priority access for its population. And so it is somewhat easier for vaccine manufacturers to introduce larger portfolios. Can AstraZeneca use its reduced footprint in flu vaccines in a deeper and more effective way in emerging markets? Although it is not a central piece of its strategy, we assume it could be useful.

There are fewer examples of Consumer Healthcare, and OTC products in particular, also playing a positive role for diversified companies. However the recent presentation by Sanofi in Sao Paulo illustrated that it matters in Brazil where it helps for negotiations with pharmacies. However, here, AstraZeneca has no intention to play.

Our understanding is that AstraZeneca will not implement a new strategy as regards diversification. Under the leadership of a new CEO and a new Chairman, it is likely to follow a pure-play strategy with few exceptions (generics in emerging markets, vaccines?).

Now not only is AstraZeneca a pure player in this industry but it is also highly exposed to Primary Care with GI, Cardiology and Respiratory franchises together representing two-thirds of the group’s total sales. And unlike GSK or Sanofi which bought local and regional brands, AstraZeneca is pretty much selling the same brands in emerging countries as in developed markets, suggesting a global approach to the topic. In volume-driven markets, it is good to have products to address segments like heartburn, high blood pressure, high cholesterol or COPD but it could also be more difficult to penetrate a new market as they are more competitive areas than oncology, CNS or rare diseases.

Be diversified helps.

Good to have primary care products to capture volume growth

AstraZeneca

24

3.5. Pipeline in phase II is a free option

3.5.1. A long series of disappointments brought expectations to a floor When people get used to hearing from a company about failures, delays and other discontinuations in R&D, they are reluctant to trust in anything going right unless there are good reasons to explain why things would change.

A change in management is such an opportunity to reinstall confidence in R&D delivery, although changes do not impact R&D directly, at least for the time being. But it is fair to expect Pascal Soriot to have started a full review of the pipeline together with the top management of the company to reassess the real value of it and if needed to reallocate resources towards assets with the greatest intrinsic value.

Before we briefly look at the pipeline, the consensus at a glance clearly says that there is little value in its R&D. In section 2.2.3. of this note, we highlighted that expectations for non-already in-the-market drugs are between USD1.5bn and USD2bn in 2017 of which USD875m is related to Forxiga, Zinforo and MEDI-3250 which are either already approved in at least one big market or not carrying any risk. Moreover fostamatinib was another USD260m which should have disappeared in the consensus majority as the last phase IIb trial unveiled disappointing results in December. The remaining value is thus negligible.

3.5.2. Where could value come from? Last June, AstraZeneca held an Investor Roundtable dedicated to R&D which should help detect those assets in phase II that are likely to be emphasised again by AstraZeneca. However it is also fair to say that Mackay and his team already showed confidence in many compounds that failed in the end, including TC-5214 and fostamatinib only a couple of months ago. So starting from this base, it is realistic to expect Pascal Soriot to make a sharp selection which is difficult for us to anticipate without having the same dataset.

Having said that, and considering that this note has no intention to review in detail the entire pipeline, we are proposing here a double list. The first includes phase III products that have not been flagged so far and factored into our future sales estimates. From now on, they will as they should report results in 2013, progress into phase III and be included in our model later on in the current year.

Three compounds in phase III have so far been ignored.

As we did with other drug companies last year, we are introducing into our sales model for AstraZeneca the drugs in phase III that so far have not been as we lacked confidence generally speaking about the company’s R&D. The three products are: naloxegol (opioid-induced constipation, with Nektar), brodalumab (psoriasis, with Amgen) and CAZ-AVI (combination of antibiotics, with Forest Labs).

We are introducing three phase III compounds in our model

AstraZeneca

25

- Naloxegol: we have a long experience of promising agents in this field of OIC that never converted successfully into marketed products (Entereg was a strong call at GSK, in collaboration with Adolor). So caution is required. However unlike other products such as fostamatinib, AstraZeneca was expecting “high level efficacy results in Q4 2012” and it did not communicate on this. This suggests it is keeping them back opportunistically. Beyond tactics, phase II data were clear-cut with 25 and 50 mg doses doing well vs placebo with reasonable and manageable side-effects. The target market is significant and as the filing date is approaching (the company is targeting H2 2013), it is fair to give nalexegol some value. If we assume a 20% penetration rate for the Top 5 markets (US, UK, Germany, Canada, France) and a USD6 daily cost of treatment over 12 weeks, then we have a market opportunity of USD1.1bn. We are assuming a 30% success rate for the drug, converting into USD350m peak sales in 2020.

- Brodalumab: this is an interesting compound whose phase II results in psoriasis were disclosed and detailed in a publication of The New England Journal of Medicine in April 2012 together with a brother compound of the same class from Lilly called ixekizumab. Both drugs are targeting and neutralising interleukin-17 (IL-17) in patients with moderate-to-severe plaque psoriasis. Both products worked very well with the highest respective doses achieving very high improvement rates in PASI scores. Various regimens were tested from weekly to monthly subcutaneous injections. Lilly’s drug appears at least as good as Amgen’s, perhaps superior. Both drugs faced few side-effects excluding some cases of neutropenias including a grade 3 case with brodalumab which resolved on discontinuation of the drug. The two drugs have a father compound called AIN457 (secukinumab) which has undisputed evidence from science already in various peer-journal reviews. Filing is expected in Q3 2013 and so AIN457 is first-in-class. Should development of brodalumab go to the end (which is supported by the increasing evidence of benefit from IL-17 inhibitors), competition will be severe and the market opportunity split among several players, not mentioning members from other classes such as ponesimod (Actelion).

- CAZ-AVI: this is the short name for the ceftazidime/avibactam combination, i.e. the combined proposition of a broad-spectrum cephalosporin (from Forest Labs) with a beta-lactamase inhibitor (from Novexel, acquired by AstraZeneca) that is currently being investigated in phase III to treat in-hospital patients with serious Gram-negative bacterial infections and more specifically intra-abdominal (IAI) and urinary (UTI) ones to offer new alternatives to overcome resistance. It has been tested in phase II with similar results to meropenem in IAI and to imipenem in UTI. Phase III trials started in 2011 and the data are expected in 2014. We have limited visibility and rationale to build a comprehensive and well-documented sales model. AstraZeneca will have commercialisation rights for the drug in ex-US territories. We are introducing the product into our estimates with reasonable peak sales of USD300m in 2019.

AstraZeneca

26

If we now move to the candidates for entry into phase III clinical trials as early as this year, several molecules were already highlighted in June 2012 and here is a short summary of what we know about them, bearing in mind that none of them has any value in our model:

- AZD6244 (selumetinib): AstraZeneca, in collaboration with Array BioPharma, has an interesting approach to the MEK pathway that, if successful, could make it first-in-class in a new market segment for the class. MEK inhibition has proven safe and efficient in phase III with GSK’s trametinib in BRAF V600E of K mutation positive metastatic melanoma patients (greater PFS and statistically significant gain in OS too with HR:0.54 and p-value: 0.0136). GSK and Roche are aiming at combining a MEK inhibitor with a BRAF inhibitor in melanoma which looks highly promising as it can not only increase efficacy but also reduce side effects. AstraZeneca had a different approach to the mechanism of action and considered how it could play out in KRAS-mutated lung cancer. Actually KRAS is mutated in around 20% of non-small cell lung cancers (NSCLC) and results in the activation of the MEK/ERK pathway. Although it looks like not all NSCLC cells carry KRAS mutation only (KRAS/PTEN is also often noticed), investigation of MEK inhibition in RAS-mutated NSCL cancers is interesting. In phase II and in second-line, proof of concept was strongly established as PFS was brought from 2.1 months with docetaxel to 5.3 months when combined with selumetinib, response rate from 0% to 37% and overall survival from 5.2 to 9.4 months while not reaching statistical significance. Since then, AstraZeneca reached agreement with Roche Molecular Diagnostics to recruit the right patients in phase III: first patient in is possible in 2013, although other phase II trials are still ongoing to better understand if and how selumetinib is useful in the lung space. This includes one phase II trial in combination with erlotinib in second-line wild-type KRAS advanced NSCLC with results expected in 2014. It is not selumetinib-specific but AstraZeneca has taken way too long to develop promising drugs and find the right designs and we can expect Pascal Soriot to improve that. Selumetinib entered phase II in Q4 2006.

Fig. 15: Selumetinib – PFS results in phase II vs docetaxel

Source: AstraZeneca

Several optionalities for other compounds that are due to enter phase III in 2013

AstraZeneca

27

- AZD8931 is defined as an erbB kinase inhibitor and although it is interesting in principle, it also has a wide scope that could be its very first disadvantage. Very few products having several mechanisms of action prove to have a well-balanced benefit-risk ratio and be successful when reaching the market. AZD8931 has a unique pharmacologic profile that provides equivalent and equipotent inhibition of erbB1 (EGFR), erbB2 (HER2) and erbB3 receptors and AstraZeneca intends to demonstrate that this could have a significant influence in solid tumours not over-expressing erbB2, i.e. not candidates to trastuzumab (Herceptin). However at this stage we note that most of the ongoing trials with AZD8931 are targeting tumours where HER2-targeted agents proved effective (i.e. breast and gastric cancers) rather than EGFR-targeted agents (lung). We would approach the drug with caution as the selection of responders is likely to be complicated, making phase III results highly unpredictable.

- Two other oncology drugs are currently progressing in phase II which may result in phase III go/no-go decisions by year-end: PDGFR-alpha antibody MEDI-575 and FGF/FGFR inhibitor AZD4547. Unlike previously studied AZD8931 they are both very targeted agents. Nevertheless they have only delivered very premature/interim sets of data so far. If we take MEDI-575 as an example, there are already several compounds that act on PDGF receptors but they are all primarily VEGFR inhibitors and also targeting CKIT or RAS (sorafenib, sunitinib, pazopanib). Moreover they are usually targeting non-specific PDGFR subgroups whereas MEDI-575 has high and exclusive affinity for the PDGFR-alpha subgroup which is associated with tumour regulation and progression while having less toxicity (less likely to develop fluid accumulation). In the end this could prove favourable. The drug is currently in development in phase II in glioblastoma and in lung cancer. With AZD4547 the point is less clear because it is indeed an FGFR-only targeting agent but it is a pan-FGFR agent. It is targeting FGFR-1, 2, 3 and 4 where each receptor subset is involved in different tumour types. For instance Novartis has a molecule called TKI258 which has different mechanisms of action but as far as FGFRs are concerned it is only targeting the FGFR-1 subtype which has been shown to be over-expressed in around 10% of breast cancers. AstraZeneca looks interested in FGFR-1 over-expressed cancers too as breast and lung (15% of gene over-expression) are developed in priority. The company is developing a personalised healthcare strategy with a companion diagnostic which should help it move into phase III in the not too distant future.

- MEDI-563 (benralizumab): outside oncology, respiratory/inflammation is the second most promising area, including molecules in a broad variety of pathologies like asthma, COPD or lupus. For most of the development programmes in the field of respiratory, AstraZeneca is using routes together with competitors. This is the case with tralokinumab, an IL-13 blocker similar to lebrikizumab from Roche but in phase II since 2008 with no sign of investigation about periostin influence. This is obviously the case with AZD8683, a long-acting muscarinic antagonist which is well behind GSK’s and Novartis’s. So more interesting is perhaps MEDI-563 which looks like a second-in-class product behind GSK’s mepolizumab, i.e. an IL-5 antagonist in development in eosinophilic asthma. Mepolizumab started its phase III programme late in October 2012 with two trials: a 32-week trial with 75 mg iv and 100 mg sc against placebo and a 24-week trial with the last two arms. In phase II, the 75 mg iv formulation showed a 48% reduction in exacerbations vs placebo. In a separate study, GSK had compared PD/PK profiles with three different doses subcutaneously (250 mg, 125 mg and 12.5 mg given every 4 weeks). AstraZeneca is currently investigating MEDI-563 in a phase IIb trial (482 patients) with three different doses only administered subcutaneously and the results are expected between the end of Q1 2013 and Q2 2013. A decrease in white blood cell counts will have to be carefully looked after with all members in the class.

AstraZeneca

28

To make a long story short, there are new opportunities emerging in phase II including several with a personalised approach and collaborative work with diagnostics for biomarker detection, early stratification and the parallel development of companion tests. Pascal Soriot should be comfortable with this approach and when he said that biologics could be mid-term catalysts during the Q3 2012 conference call he was more than probably referring to what MedImmune in particular has in phase II. Roche has strong expertise in oncology, respiratory and inflammation and so the pipeline Pascal Soriot is inheriting at AstraZeneca is one he will be very legitimately able to speak about. In other words, if based on phase IIb results some of the above-mentioned drugs are progressed into phase III, then there will be some rationale to immediately put some value on them. So while we put no value at all on any of these products ahead of phase II data, there are potential upsides in the course of 2013 if and when the results are positive.

AstraZeneca

29

4. Financials and valuation It is difficult to make assessments in advance because what is going to be presented on 31 January 2013 is key and largely unknown. But we can imagine that the following topics are (i) likely to be at the centre of the discussion and (ii) obviously drivers for the company.

4.1. M&A activity is likely to go on Over the past year AstraZeneca finalised three game-changing deals or acquisitions that strengthened its positions in the diabetes market and its R&D pipeline in inflammation as illustrated on Fig.16. While the deal with Amgen is only marginally front-loaded (USD50m), AstraZeneca cumulatively spent USD4.8bn for Ardea and its part of Amylin.

Fig. 16: Three M&A deals in 2012 Company Area Type of deal Financial arrangement Date

Amgen Inflammation Partnership to develop and commercialise 5

monoclonal antibodies, first o/w is brodalumab in

phase II for psoriasis

USD50m upfront, 50/50

costs & profits beyond

single-digit royalty for

Amgen

April 2012

Ardea Biosciences Inflammation Acquisition of company whose main asset is

lesinurad, an innovative treatment for gout

currently in phase III

Acquisition price :

USD1.26bn

June 2012

Amylin Diabetes Acquisition of company together with BMS 50/50.

Access to GLP1 portfolio made of Byetta and

Bydureon

Acquisition price :

USD3.4bn + USD135m

for equal governance

August 2012

Source: Company Data; Bryan, Garnier & Co ests.

As we consider the options Pascal Soriot has to increase the dynamism of AstraZeneca’s top-line in the coming years and to prepare the group for other patent expiries in 2014 and 2016 (Nexium in the US, Seroquel XR, Crestor), we see M&A as one he is likely to use. Chris Viehbacher acted similarly at Sanofi. There is not enough leverage within the group to drive revenues at a decent pace over the coming years. The new management can do better than the market expects but cannot perform miracles with the current portfolio and upcoming R&D deliveries.

Actelion and Shire, just to mention these two which belong to our coverage, are among targets that were rumoured to be of interest for AstraZeneca. We agree. o We would even consider that it was a mistake not to have taken Shire earlier. With

strong positions in two key areas, i.e. CNS and rare diseases, it would have been a perfect fit with AstraZeneca’s portfolio to diversify CNS from psychiatry into ADHD while entering the lucrative and desirable orphan drug market where all pharmaceutical companies want to take a seat. Moreover, Shire is largely focused on the US and the UK markets both in terms of revenue split and cost structure which represent an opportunity for AstraZeneca, first to diversify and expand in emerging markets and second to cut costs sharply as they are based in the same areas.

Actelion and Shire would fit

AstraZeneca

30

o As for Actelion, we were more balanced historically but we are now turning more

positive and believe it could make sense. Until the Swiss company delivered positive phase III results with macitentan it would have been too risky for AstraZeneca to think about Actelion as prey. Tracleer is no longer a growth engine whereas its patent expires at around the same date as Crestor and so it would have added items into the risk column. With Opsumit now likely on its way to the market but also with two additional phase II assets moving to phase III (i.e. ponesimod in psoriasis and cadazolid in C. diff. infections), not only may this be the right time to look at Actelion but all three products are synergistic with AstraZeneca’s in-focus therapeutic areas and other late-stage compounds.

Now these would be transformational deals. Although it is our guess that one like this is required to change the short-term perspectives at AstraZeneca, this may well be ruled out by top management to the benefit of more medium-sized and targeted acquisitions. If it is in line with the strategy that Pascal Soriot will present to the financial community on 31 January 2013, then we are optimistic that the market reaction is likely to be positive on any announcement of this kind (as we rule out any risk of major dilution).

4.2. Productivity gains still on the cards Pascal Soriot is likely to draw the market’s attention towards the top-line and to spend much of his time restoring hope in revenue growth in the not too distant future. Having said that, it often takes longer to boost top-line growth compared to further streamlining the organisation and hunting for cost cuttings. As a reminder, a third-phase of the restructuring programme is ongoing at AstraZeneca. This was announced a year ago and most of the USD2.1bn implementation cost will have been charged in 2012. It is expected to deliver USD1.6bn in annual benefits by the end of 2014, although net-from-re-investment benefits have not been disclosed. In our view there is little to no expectations in the consensus as it is increasingly difficult to monitor net benefits. As stated in the Q3 press release: “restructuring programmes and continued discipline in operating expenses have provided headroom for reinvestment in the business […]”. Here again if we compare to what Sanofi did in 2009, the EUR2bn cost-cutting programme was at the centre of the message. It could be interesting, rather than just talking about numbers and adding yet another programme to the previous one, if Pascal Soriot or Simon Lowth could highlight where and how AstraZeneca can further optimise the organisation.

4.3. New Core EPS to be implemented On 12 November 2012, AstraZeneca sent investors and sell-side analysts covering the stock a press release with an attached excel spreadsheet to define new Core financial measures. The two changes relate to intangible asset amortisations and impairment charges that previously were not restated, with the exception of the significant MedImmune acquisition and the Merck arrangement. So we agree with this principle which makes AstraZeneca more comparable with peers like Novartis or Sanofi. This will take effect from Q1 2013.

AstraZeneca

31

This is what it looks like:

Fig. 17: Implementation of new Core financial measures 2011 Q1 2012 Q2 2012 Q3 2012 9M 2012 2012e

Core EBIT (USDm)

before change 13 167 2 997 2 269 2 632 7 898 10 334

after change 13 932 3 106 2 334 2 924 8 364 11 047

difference 6% 4% 3% 11% 6% 7%

Core EBIT margin

before change 39.2% 40.8% 34.1% 39.4% 38.2% 37.1%

after change 41.5% 42.3% 35.1% 43.8% 40.4% 39.4%

difference 2.3% 1.5% 1.0% 4.4% 2.2% 2.3%

Core EPS (USD)

before change 7.28 1.81 1.53 1.51 4.85 6.23

after change 7.72 1.88 1.58 1.69 5.15 6.69

difference 6% 4% 3% 12% 6% 7%

Source: Company Data; Bryan, Garnier & Co ests.

How significant is this change? We would be inclined to say ‘not so much’ because it is not as if AstraZeneca was moving to full Core metrics from reported not-at-all restated numbers. What also makes the difference more significant in the last quarter is the restatement of intangible amortisation from the Amylin acquisition. But obviously Amylin could have been restated individually with or without new Core standards. It would have been fair to do it whatever.

Now where the changes make a difference is if and when a peer comparison is considered based on EV/EBIT or P/E ratios because new Core EBIT and new Core EPS are then used, making AstraZeneca cheaper than it used to be. For DCF and EVA, it makes no difference because these elements were obviously already factored in. While we usually don’t use comparisons to set up target price or FV, AstraZeneca is a case where it might make sense: indeed the only context where we can accept to consider comparisons as useful and potentially predictive is a sudden disruption that could mean a status change for the stock. There are always good reasons to explain why a stock trades with a premium or a discount to its peers but when something significant happens to the company then it can be interesting to assess if it can trigger a gap close. For companies as large as AstraZeneca, this is unusual except when a management change materialises in the need for deep changes. Here, not only did the Chairman and CEO get changed in 2012 but a few days ago two other top-executive managers were said to be leaving, namely the Head of R&D Martin Mackay and the Head of Global Operations Tony Zook whose positions are eliminated. They may have paid the price for the failure in R&D delivery and US Brilinta’s launch respectively.

New Core EPS is 7% above old one

A status change ?

AstraZeneca

32

When we look at tables like the one below, we can objectively state that although AstraZeneca is not showing any growth in 2012-2015 (based on what we know), whichever ratio we use and whenever we look, the company is severely discounted for that. Should Pascal Soriot succeed in bringing both financials and confidence upward revisions, we could imagine part of the gap closing fairly quickly. With new Core EPS for instance, P/E 2014 would stand at 7.6x or a 25% discount to peer average. Should half the gap close, the share price would jump to 3,500p.

Source: Bryan, Garnier & Co ests.

4.4. New FV While we recognise that a status change is possible that would open the opportunity to use a valuation methodology based on comparables (see above), we won’t include this method for the FV calculation until we acquire higher visibility and confidence in such a change, which cannot happen before Pascal Soriot speaks. As a consequence, our FV remains the average between the two methodologies, i.e. DCF and EVA with equal weight. As we start 2013, we at Bryan Garnier & Co reassessed our hypothesis for all valuation models, still using long-term views. Equity-Risk Premium (ERP) moved downwards from 6.3% to 6.1% whereas Risk-free Rate (RFR) came down from 3.4% to 3.3%. We applied the new rates for the purpose of this report and the new FV calculation. The impact on the FV is positive by 140p/share. We rolled our models over to 2013 with no impact in the end as declining results over the years to come had an increasingly negative influence which was offset by the debt increase which further reduced WACC. WACC came down from 8.91% to 8.49%. As for R&D, as stated in this report, we opted for the inclusion of the remaining three compounds in phase III that were not factored in so far namely naloxegol (with a 30% success rate considering high failure rate in the field), brodalumab (with a 50% success rate) and CAZ-AVI (with no discount but cautious peak sales). Altogether the three are adding 150p/share to the FV. We have also fine-tuned our financial expectations on several fronts in the P&L, in the cash-flow statement and in the balance sheet. For instance we had expectations of annual capital expenditures of USD1.1bn but actually it looks like AstraZeneca will be able to run its business with a lower level closer to USD900m. This isolated item adds 100p/share to the FV. In total, all changes here are impacting the FV by 265p/share.

Price at PER EV / SALES EV / EBIT EPS CAGR

15-janv-13 2012 2013 2014e 2015e 2012 2013 2014e 2015e 2012 2013 2014e 2015e 12-15

Pharmaceuticals

ASTRAZENECA GBP 3041.5 7.3 8.0 7.7 7.6 2.2 2.2 2.0 1.9 7.9 7.6 6.7 5.9 -1.2%GLAXOSMITHKLINE GBP 1363 12.3 11.2 10.2 9.7 2.9 2.8 2.6 2.5 9.5 8.9 8.1 7.5 8.4%NOVARTIS CHF 60.4 12.3 11.7 10.6 11.7 3.2 3.0 2.7 3.0 14.9 12.9 11.1 12.9 1.6%ROCHE HOLDING CHF 197.1 14.6 12.7 11.7 11.4 4.0 3.7 3.5 3.3 12.4 10.2 9.2 8.7 8.6%SANOFI EUR 72.15 11.6 11.5 10.3 9.5 2.9 2.7 2.5 2.2 8.8 8.2 7.1 6.3 7.2%

Average 11.6 11.0 10.1 10.0 3.1 2.9 2.7 2.6 10.7 9.6 8.4 8.3 4.9%

Median 12.3 11.5 10.3 9.7 2.9 2.8 2.6 2.5 9.5 8.9 8.1 7.5 7.2%

A new FV of 3,440p

AstraZeneca

33

Lastly we changed the number of shares used in our DCF and EVA models to take year-end 2012 estimated levels. The benefit on our FV is 25p/share.

Fig. 18: Summary of key items behind FV changes

Source: Bryan, Garnier & Co ests.

Below are the details for the DCF and EVA calculations, considering that growth to infinity (starting in 2020) is 1% for AstraZeneca.

4.4.1. Discounted EVA: FV of 3,375p Fig. 19: Summary of key financials for EVA valuation methodology USDm 2013 2014 2015 2016 2017 2018 2019 2020

Tangible assets 7 199 7 059 6 919 6 779 6 639 6 499 6 359 6 219

Working capital 2 380 2 360 2 311 2 315 1 768 1 398 1 098 828

Intangible assets 21 788 20 228 18 668 17 108 15 548 13 988 12 428 10 868

Invested Capital 31 367 29 647 27 898 26 202 23 955 21 885 19 885 17 915

Core EBIT 8 557 8 734 8 887 8 695 7 352 7 017 6 633 6 202

Tax rate 23.0% 23.0% 22.5% 22.5% 22.5% 22.5% 22.5% 22.5%

NOPLAT 6 589 6 725 6 887 6 739 5 698 5 438 5 141 4 806

NOPLAT / Invested Capital 21.0% 22.7% 24.7% 25.7% 23.8% 24.8% 25.9% 26.8%

Cost of Capital (WACC) 8.49% 8.49% 8.49% 8.49% 8.49% 8.49% 8.49% 8.49%

Spread 12.52% 14.20% 16.20% 17.23% 15.30% 16.36% 17.37% 18.34%

Value Creation (VC) 3 927 4 210 4 520 4 516 3 665 3 581 3 453 3 286

Discount rate 1.00 0.92 0.85 0.78 0.72 0.67 0.61 0.57

Discounted VC 3 927 3 881 3 841 3 537 2 646 2 383 2 119 1 858

Source: Bryan Garnier & Co ests.

AstraZeneca

34

Fig. 20: FV derived from discounted EVA method (USDm)

Sum of annual value-added premiums 49,266.50

Equity 22,899,72

Intrinsic value of operations 72,166.22

Provisions 4,536.00

Net financial debt 1,835.83

Financial assets 2,057.00

Minority interests 251.00

Embedded equity value 67,600.39

No. of shares 1,245

Equity value per share (p) 3,375

Source: Bryan, Garnier & Co ests.

4.4.2. DCF: FV of 3,503p

Fig. 21: Discounted cash flows calculation M$ 2013 2014 2015 2016 2017 2018 2019 2020

Operating cash-flows 10 267 10 334 10 357 10 165 8 822 8 487 8 103 7 672

Tax -2 361 -2 377 -2 330 -2 287 -1 985 -1 910 -1 823 -1 726

Capex -900 -900 -900 -900 -900 -900 -900 -900

Free Cash Flows 7 006 7 057 7 126 6 978 5 937 5 677 5 380 5 046

Discounted rate 1.00 0.92 0.85 0.78 0.72 0.67 0.61 0.57

Discounted Free Cash Flows 7 006 6 505 6 055 5 465 4 286 3 778 3 300 2 853

Source: Bryan, Garnier & Co ests.

Fig. 22: Calcul de la FV dérivée de la méthode d’actualisation des DCF (USDm)

Sum of discounted cash-flows 74,738

o/w [2013-2020] 39,250 (53%)

o/w >2020 35,488 (47%)

Net financial debt 1,836

Provisions 4,536

Minority interests 251

Net discounted cash flows 70,172

No of shares (m) 1,245

Per share value (p) 3,503

Source: Bryan, Garnier & Co ests.

AstraZeneca

35

APPENDIX: Revenue estimates USDm 2011 2012e var 2013e var 2014e var 2015e var 2016e var 2017e var

Losec 946 756 -20% 627 -17% 589 -6% 554 -6% 522 -6% 478 -8%

Nexium 4 429 3 849 -13% 3 463 -10% 2 581 -25% 1 801 -30% 1 681 -7% 1 577 -6%

Naloxegol 0 0 0 0 50 120 140% 180 50%

Total Gastrointestinal 5 536 4 806 -13% 4 291 -11% 3 371 -21% 2 606 -23% 2 524 -3% 2 436 -4%

Toprol XL 986 885 -10% 835 -6% 800 -4% 768 -4% 715 -7% 666 -7%

Atacand 1 450 1 008 -30% 698 -31% 571 -18% 553 -3% 536 -3% 521 -3%

Plendil 256 245 -4% 204 -16% 174 -15% 148 -15% 126 -15% 107 -15%

Tenormin 270 238 -12% 210 -12% 192 -9% 170 -11% 146 -14% 119 -18%

Crestor 6 622 6 275 -5% 6 276 0% 6 439 3% 6 587 2% 6 095 -7% 3 266 -46%

Brilinta 21 105 400% 470 348% 870 85% 1 150 32% 1 500 30% 1 750 17%

Onglyza 211 330 56% 515 56% 635 23% 750 18% 860 15% 935 9%

Forxiga - dapagliflozin 0 0 25 129 416% 256 98% 350 37% 450 29%

Byetta 0 75 135 81% 74 -46% 60 -19% 50 -16% 40 -20%

Bydureon 0 17 150 263 75% 356 36% 460 29% 540 17%

Total Cardiovascular 10 212 9 520 -7% 9 864 4% 10 508 7% 11 162 6% 11 192 0% 8 713 -22%

Pulmicort 892 851 -5% 822 -3% 799 -3% 780 -2% 751 -4% 725 -3%

Rhinocort 212 183 -13% 162 -12% 143 -12% 129 -10% 116 -10% 99 -14%

Symbicort 3 148 3 194 1% 3 358 5% 3 250 -3% 3 029 -7% 2 641 -13% 2 050 -22%

Total Respiratory 4 468 4 416 -1% 4 519 2% 4 360 -4% 4 097 -6% 3 658 -11% 3 016 -18%

Casodex 550 489 -11% 422 -14% 362 -14% 310 -14% 267 -14% 229 -14%

Zoladex 1 179 1 107 -6% 1 088 -2% 1 094 1% 1 092 0% 1 080 -1% 1 045 -3%

Arimidex 756 572 -24% 454 -21% 403 -11% 367 -9% 334 -9% 320 -4%

Iressa 554 638 15% 665 4% 700 5% 733 5% 714 -3% 684 -4%

Faslodex 546 661 21% 754 14% 791 5% 831 5% 872 5% 872 0%

Caprelsa (vandetanib) 8 25 213% 100 300% 160 60% 200 25% 230 15% 250 9%

Total Oncology 3 705 3 604 -3% 3 584 -1% 3 603 1% 3 619 0% 3 575 -1% 3 472 -3%

Seroquel IR 4 338 1 358 -69% 568 -58% 416 -27% 372 -11% 331 -11% 302 -9%

Seroquel XR 1 490 1 540 3% 1 666 8% 1 739 4% 1 702 -2% 1 404 -18% 708 -50%

Zomig 413 213 -48% 157 -26% 120 -24% 101 -16% 91 -10% 81 -10%

Diprivan 294 278 -5% 281 1% 283 1% 283 0% 284 0% 279 -2%

Local anaesthetics 602 546 -9% 522 -4% 507 -3% 493 -3% 478 -3% 463 -3%

Vimovo 34 65 91% 120 85% 160 33% 190 19% 200 5% 200 0%

Total Neuroscience 7 204 4 040 -44% 3 354 -17% 3 264 -3% 3 180 -3% 2 827 -11% 2 073 -27%

Merrem 583 396 -32% 352 -11% 321 -9% 295 -8% 265 -10% 237 -11%

Flumist/MEDI 161 180 12% 280 56% 300 7% 300 0% 300 0% 300 0%

Synagis 975 950 -3% 1 050 11% 1 200 14% 1 300 8% 1 400 8% 1 400 0%

Ceftaroline (Forest) 0 10 100 900% 200 100% 300 50% 340 13% 360 6%

CAZ-AVI 0 0 0 0 40 120 200% 180 50%

lesinurad (Ardea, gout) 0 0 0 0 50 150 200% 300 100%

brodalumab 0 0 0 0 15 40 167% 75 88%

Infection & Other 1 856 1 645 -11% 1 886 15% 2 120 12% 2 394 13% 2 705 13% 2 936 9%

TOTAL 33 591 28 081 -16% 27 524 -2% 27 251 -1% 27 082 -1% 26 505 -2% 22 671 -14%

Source: Company Data; Bryan, Garnier & Co ests.

AstraZeneca

36

AstraZeneca

37

Price Chart and Rating History

AstraZeneca

Ratings

Date Ratings Price

18/07/11 NEUTRAL 3093p

Target Price

Date Target price

15/11/12 2860p

26/10/12 2760p

02/10/12 2750p

10/08/12 2780p

03/07/12 2720p

27/04/12 2700p

03/02/12 3020p

20/12/11 3240p

28/10/11 3380p

30/09/11 3320p

02/09/11 3280p

29/07/11 3470p

18/07/11 3460p

16/1/13

2010 2011 20122500

2600

2700

2800

2900

3000

3100

3200

3300

3400

ASTRAZENECA

Source: Thomson Reuters Datastream

AstraZeneca

38

AstraZeneca

39

Bryan Garnier stock rating system For the purposes of this Report, the Bryan Garnier stock rating system is defined as follows: Stock rating

BUY Positive opinion for a stock where we expect a favourable performance in absolute terms over a period of 6 months from the publication of a recommendation. This opinion is based not only on the FV (the potential upside based on valuation), but also takes into account a number of elements including a SWOT analysis, positive momentum, technical aspects and the sector backdrop. Every subsequent published update on the stock will feature an introduction outlining the key reasons behind the opinion.

NEUTRAL Opinion recommending not to trade in a stock short-term, neither as a BUYER or a SELLER, due to a specific set of factors. This view is intended to be temporary. It may reflect different situations, but in particular those where a fair value shows no significant potential or where an upcoming binary event constitutes a high-risk that is difficult to quantify. Every subsequent published update on the stock will feature an introduction outlining the key reasons behind the opinion.

SELL Negative opinion for a stock where we expect an unfavourable performance in absolute terms over a period of 6 months from the publication of a recommendation. This opinion is based not only on the FV (the potential downside based on valuation), but also takes into account a number of elements including a SWOT analysis, positive momentum, technical aspects and the sector backdrop. Every subsequent published update on the stock will feature an introduction outlining the key reasons behind the opinion.

Distribution of stock ratings

BUY ratings 50.5% NEUTRAL ratings 29.4% SELL ratings 20.2%

Research Disclosure Legend

1 Bryan Garnier shareholding in Issuer

Bryan Garnier & Co Limited or another company in its group (together, the “Bryan Garnier Group”) has a shareholding that, individually or combined, exceeds 5% of the paid up and issued share capital of a company that is the subject of this Report (the “Issuer”).

No

2 Issuer shareholding in Bryan Garnier

The Issuer has a shareholding that exceeds 5% of the paid up and issued share capital of one or more members of the Bryan Garnier Group.

No

3 Financial interest A member of the Bryan Garnier Group holds one or more financial interests in relation to the Issuer which are significant in relation to this report

No

4 Market maker or liquidity provider

A member of the Bryan Garnier Group is a market maker or liquidity provider in the securities of the Issuer or in any related derivatives.

No

5 Lead/co-lead manager In the past twelve months, a member of the Bryan Garnier Group has been lead manager or co-lead manager of one or more publicly disclosed offers of securities of the Issuer or in any related derivatives.

No

6 Investment banking agreement

A member of the Bryan Garnier Group is or has in the past twelve months been party to an agreement with the Issuer relating to the provision of investment banking services, or has in that period received payment or been promised payment in respect of such services.

No

7 Research agreement A member of the Bryan Garnier Group is party to an agreement with the Issuer relating to the production of this Report.

No

8 Analyst receipt or purchase of shares in Issuer

The investment analyst or another person involved in the preparation of this Report has received or purchased shares of the Issuer prior to a public offering of those shares.

No

9 Remuneration of analyst The remuneration of the investment analyst or other persons involved in the preparation of this Report is tied to investment banking transactions performed by the Bryan Garnier Group.

No

10 Corporate finance client In the past twelve months a member of the Bryan Garnier Group has been remunerated for providing corporate finance services to the issuer or may expect to receive or intend to seek remuneration for corporate finance services from the Issuer in the next six months.

No

11 Analyst has short position The investment analyst or another person involved in the preparation of this Report has a short position in the securities or derivatives of the Issuer.

No

12 Analyst has long position The investment analyst or another person involved in the preparation of this Report has a long position in the securities or derivatives of the Issuer.

No

13 Bryan Garnier executive is an officer

A partner, director, officer, employee or agent of the Bryan Garnier Group, or a member of such person’s household, is a partner, director, officer or an employee of, or adviser to, the Issuer or one of its parents or subsidiaries. The name of such person or persons is disclosed above.

No

14 Analyst disclosure The analyst hereby certifies that neither the views expressed in the research, nor the timing of the publication of the research has been influenced by any knowledge of clients positions and that the views expressed in the report accurately reflect his/her personal views about the investment and issuer to which the report relates and that no part of his/her remuneration was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in the report.

Yes

15 Other disclosures Other specific disclosures: Report sent to Issuer to verify factual accuracy (with the recommendation/rating, price target/spread and summary of conclusions removed).

No

A copy of the Bryan Garnier & Co Limited conflicts policy in relation to the production of research is available at www.bryangarnier.com

London Dowgate Hill House 14-16 Dow Gate Hill London EC4R 2SU Tel: +44 (0) 207 332 2500 Fax: +44 (0) 207 332 2559 Authorised and regulated by the Financial Services Authority (FSA)

Paris 26 Avenue des Champs Elysées 75008 Paris Tel: +33 (0) 1 56 68 75 00 Fax: +33 (0) 1 56 68 75 01 Regulated by the Financial Services Authority (FSA) and l’Autorité des Marchés Financiers (AMF)

New York 750 Lexington Avenue New York, NY 10022 Tel: +1 (0) 212 337 7000 Fax: +1 (0) 212 337 7002 FINRA and SIPC member

Geneva rue de Grenus 7 CP 2113 Genève 1, CH 1211 Tel +4122 731 3263 Fax+4122731 3243 Regulated by the Swiss Federal Banking Commission

New Delhi The Imperial Hotel Janpath New Delhi 110 001 Tel +91 11 4132 6062 +91 98 1111 5119 Fax +91 11 2621 9062

Important information This independent investment research report (the “Report”) was prepared by Bryan Garnier & Co Limited and is being distributed only to clients of Bryan Garnier & Co Limited (the “Firm”). Bryan Garnier & Co Limited is authorised and regulated by the Financial Services Authority (the “FSA”) and is a member of the London Stock Exchange. This Report is provided for information purposes only and does not constitute an offer, or a solicitation of an offer, to buy or sell relevant securities, including securities mentioned in this Report and options, warrants or rights to or interests in any such securities. This Report is for general circulation to clients of the Firm and as such is not, and should not be construed as, investment advice or a personal recommendation. No account is taken of the investment objectives, financial situation or particular needs of any person. The information and opinions contained in this Report have been compiled from and are based upon generally available information which the Firm believes to be reliable but the accuracy of which cannot be guaranteed. All components and estimates given are statements of the Firm, or an associated company’s, opinion only and no express representation or warranty is given or should be implied from such statements. All opinions expressed in this Report are subject to change without notice. To the fullest extent permitted by law neither the Firm nor any associated company accept any liability whatsoever for any direct or consequential loss arising from the use of this Report. Information may be available to the Firm and/or associated companies which are not reflected in this Report. The Firm or an associated company may have a consulting relationship with a company which is the subject of this Report. This Report may not be reproduced, distributed or published by you for any purpose except with the Firms’ prior written permission. The Firm reserves all rights in relation to this Report. Past performance information contained in this Report is not an indication of future performance. The information in this report has not been audited or verified by an independent party and should not be seen as an indication of returns which might be received by investors. Similarly, where projections, forecasts, targeted or illustrative returns or related statements or expressions of opinion are given (“Forward Looking Information”) they should not be regarded as a guarantee, prediction or definitive statement of fact or probability. Actual events and circumstances are difficult or impossible to predict and will differ from assumptions. A number of factors, in addition to the risk factors stated in this Report, could cause actual results to differ materially from those in any Forward Looking Information.

Disclosures specific to clients in the United Kingdom This Report has not been approved by Bryan Garnier & Co Limited for the purposes of section 21 of the Financial Services and Markets Act 2000 because it is being distributed in the United Kingdom only to persons who have been classified by Bryan Garnier & Co Limited as professional clients or eligible counterparties. Any recipient who is not such a person should return the Report to Bryan Garnier & Co Limited immediately and should not rely on it for any purposes whatsoever.

Notice to US investors This research report (the “Report”) was prepared by Bryan Garnier & Co. Ltd. for information purposes only. The Report is intended for distribution in the United States to “Major US Institutional Investors” as defined in SEC Rule 15a-6 and may not be furnished to any other person in the United States. Each Major US Institutional Investor which receives a copy of this Report by its acceptance hereof represents and agrees that it shall not distribute or provide this Report to any other person. Any US person that desires to effect transactions in any security discussed in this Report should call or write to our US affiliated broker, Bryan Garnier Securities, LLC. 750 Lexington Avenue, New York NY 10022. Telephone: 1-212-337-7000. This Report is based on information obtained from sources that Bryan Garnier & Co. Ltd. believes to be reliable and, to the best of its knowledge, contains no misleading, untrue or false statements but which it has not independently verified. Neither Bryan Garnier & Co. Ltd. and/or Bryan Garnier Securities LLC make no guarantee, representation or warranty as to its accuracy or completeness. Expressions of opinion herein are subject to change without notice. This Report is not an offer to buy or sell any security. Bryan Garnier Securities, LLC and/or its affiliate, Bryan Garnier & Co. Ltd. may own more than 1% of the securities of the company(ies) which is (are) the subject matter of this Report, may act as a market maker in the securities of the company(ies) discussed herein, may manage or co-manage a public offering of securities for the subject company(ies), may sell such securities to or buy them from customers on a principal basis and may also perform or seek to perform investment banking services for the company(ies).

Bryan Garnier Securities, LLC and/or Bryan Garnier & Co. Ltd. are unaware of any actual, material conflict of interest of the research analyst who prepared this Report and are also not aware that the research analyst knew or had reason to know of any actual, material conflict of interest at the time this Report is distributed or made available.