Cash flow from operations before R&D was £79 million higher than last year. The net investment in business reorganisation was £20 million compared with £13 million in 1999, reflecting lower proceeds from disposals and sales. We have increased by £57 million to £315 million our investments in business development with increases in R&D, and with £38 million in acquisitions, primarily in new intellectual property for Amersham Pharmacia Biotech, together with £17 million to purchase Nycomed Amersham shares to hedge share option plans in North America where share incentives form a vitally important part of overall remuneration. Capital expenditure was similar to 1999 at £128 million, following completion of the US manufacturing and research expansion plan at the Piscataway site in Amersham Pharmacia Biotech and completion of our new manufacturing plant in China in Nycomed Amersham Imaging.

After net payments for financing, tax and dividends there was a cash inflow of £7 million. The cash flows are further analysed by business in the following table.

Our Imaging business continues to generate strong cash flow for the group with £106 million realised in 2000, an increase of 36 per cent from £78 million last year. We continue to invest for growth in Amersham Pharmacia Biotech, particularly in R&D and in acquiring new technologies from third parties. Our business acquisitions and investments in Amersham Pharmacia Biotech amounted to £30 million and were focused in the areas of genomics, protein analysis systems, cell-based drug target screening and bioinformatics. In addition, we increased our R&D investment to £72 million. Our overall net investment amounted to £8 million in Amersham Pharmacia Biotech. Our corporate and other cash flows include integration and exceptional costs of £15 million in 2000.

Net debt increased by £25 million including £32 million as a result of exchange movements. Despite this we continue to strengthen our financial position with the ratio of net debt to enterprise value (market capitalisation plus net debt), a key measure of gearing, reducing from 11 per cent at 31 December 1999 to eight per cent at 31 December 2000. Interest cover improved from nine to 23 times covered by operating profit.

Treasury policy and liquidity
Treasury policy and objectives
Our treasury activities are co-ordinated and managed by the group treasury department in accordance with policies approved by the board. These policies are reviewed regularly and have not changed significantly over the past year. The department operates under close management supervision and is subject to review by internal audit. It does not operate as a profit centre and no speculative transactions are undertaken.

Financial instruments
The group uses financial instruments, primarily forward foreign exchange contracts and interest rate swaps, in the management of currency and interest rate exposures. Clear procedures have been established, including levels of authority, regarding the type and use of financial instruments to manage these exposures. These procedures have been approved by the board. The group controls credit risk by entering into transactions involving financial instruments only with authorised counter-parties of strong credit quality. Counter-party positions are monitored regularly.

Funding
The group requirement for debt funding is managed by group treasury. The group finances its operations through a variety of instruments and maturities. In general, subsidiaries’ borrowing requirements are funded by loans from group treasury, except where precluded by local regulations. The principal borrowings during the period were under a £600 million committed revolving bank credit facility and US$213 million of private placement loan notes. At 31 December 2000, the group had net debt of £324 million and undrawn committed facilities of £384 million.

Interest rate management
The group’s interest charge is exposed to movements in interest rates as well as debt levels. We maintain a policy of holding between 30 and 70 per cent of debt at fixed rates. The group uses currency and interest rate swaps to manage its interest rate exposures on debt and cash positions. The interest rate profile of the group is shown in note 20 to the financial statements. At 31 December 2000, after taking into account interest rate swaps, 45 per cent of net debt was at fixed rates. The average maturity of this fixed rate debt was 3.7 years.

Currency management
The group’s manufacturing activities and costs are concentrated in a small number of countries, primarily the US, Norway, Sweden and the United Kingdom. Sales income is spread more widely. Overall the group has net income in US dollars, euros and Japanese yen. It has net costs in sterling, Norwegian kroner and Swedish krona.

The group’s principal financial exposures are to movements in currency exchange rates. These comprise transaction exposures arising from currency cash flows and translation exposures arising from the conversion of the results of foreign subsidiaries. Transaction exposures are hedged on a rolling six month basis, primarily by forward foreign exchange transactions. In addition, where sterling has deviated significantly from its long term purchasing power parity rates, strategic hedging is undertaken for periods of up to three years. During the year, we took advantage of the strength of the Japanese yen and the US dollar by selling forward an increased proportion of our anticipated income in these currencies for the next three years in accordance with our strategic hedging policy. Translation exposures on the net monetary assets of foreign subsidiaries are hedged partly by borrowings in those currencies and partly by financial instruments including forward foreign exchange contracts. An analysis of net monetary assets by functional currency is shown in note 20 to the financial statements. Translation exposures on the results of foreign subsidiaries are not hedged. Equity investments in certain subsidiaries and associated companies are hedged by financial instruments in the currencies of the investments.

In 2000, profit before tax was impacted by an unfavourable exchange effect of £3 million following the strengthening of the pound against the euro which more than offset the beneficial effect of the weakening of the pound against the Japanese yen and the US dollar.

Introduction of the euro
Following a transition period, in 2002 national currencies will be replaced by the euro as the sole currency for those countries within the euro zone. The commercial impact of the euro remains less for our business than for those in other industry sectors, since we operate mainly in highly regulated markets. Substantial work has been carried out across the group. However, we continue the development of our systems and procedures for the 2002 transition, as a result of which we expect to be fully euro-compliant.

Giles Kerr
Finance Director