March 28, 2011 / 6:22 AM / 9 years ago

UPDATE 3-AstraZeneca tax settlement to boost 2011 earnings

* To pay net $1.1 bln to resolve U.S. transfer pricing issue

* Core EPS forecast raised to $6.90-$7.20 from $6.45-$6.75

* Provision release to boost Q1 earnings by $500 million

* Shares rise 1.3 percent (Adds analyst comment, latest shares)

By Ben Hirschler

LONDON, March 28 (Reuters) - AstraZeneca (AZN.L) raised its profit outlook for the year on Monday after reaching an agreement with British and U.S. tax authorities that will see it pay less tax than it had budgeted for.

The settlement of matters dating back more than a decade means Britain’s second-biggest drugmaker will pay a net amount of $1.1 billion in 2011 to resolve U.S. transfer pricing issues. It had previously made provisions for $2.3 billion.

As a result, AstraZeneca expects 2011 core earnings, excluding some charges, to be between $6.90 and $7.20 per share, up from the $6.45-$6.75 range indicated previously, as unused provisions for tax drop through to the bottom line.

There will be a $500 million boost to earnings in the first quarter and the effective tax rate for the year will be some 6 percentage points lower than thought, at around 21 percent.

The news is a fillip to the company’s profit line at a time when it faces increasing challenges to some of its top-selling drugs from generic competition.

Shares in AstraZeneca rose 1.3 percent by 0825 GMT, modestly outperforming a 0.5 percent increase in the European drugs sector .SXDP.

“It’s a windfall and the market doesn’t want to put a P/E (price-to-earnings ratio) on a windfall that is not part of the operating business ... but it removes an overhang,” said Panmure Gordon analyst Savvas Neophytou, who rates the stock a “buy”.

AstraZeneca could look slightly more attractive to an acquirer with the removal of the liability, although big pharmaceutical companies do not seem to be looking for major acquisitions just now, he added.

The latest settlement follows an earlier agreement with the British tax authorities on transfer pricing in February 2010, which also resulted in payments that were less than had been provided for, resulting in increased 2010 earnings.

Transfer pricing concerns the price at which one unit of a group sells goods or services to another unit of the same group. Such practices are receiving increased attention as tax authorities around the world seek to limit any abuse of intra-company transfers of expenses or profits. (Editing by Greg Mahlich and Jon Loades-Carter)

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