AstraZeneca plc (AZN) reported first-quarter fiscal 2011 core earnings of $2.23 per American Depositary Share (ADS), reflecting an increase of 10% (at constant exchange rates [CER]) from the prior-year quarter. The Zacks Consensus Estimate for the reported quarter was $2.04 per share. Including one-time items, earnings came in at $2.08, up 10%.
Despite lower revenues, earnings climbed as a result of lower tax rate and lower number of shares outstanding.
Revenues
AstraZeneca’s first quarter revenues declined 4% year over year to $8.3 billion owing to intense generic competition and government price interventions. However, revenues were in line with the Zacks Consensus Estimate.
Generic competition for major products in the US and the impact of the healthcare reform led to an 11% slide in US revenues. The Rest of the World (RoW) market saw a hike of mere 1%, primarily driven by a 13% increase in Emerging Markets.
The drugs facing generic competition in the US include Arimidex (down 55% to $233 million), Toprol-XL (down 34% to $245 million), Casodex (down 12% to $133 million) and Merrem (down 27% to $172 million). The decline in revenues from these products more than offset the strong sales growth of Crestor (up 12% to $1.5 billion), Iressa (up 40% to $121 million), Seroquel XR (up 33% to $339 million) and Symbicort (up 8% to $752 million).
RoW revenues were boosted mainly by robust volume growth of products like Crestor, Nexium and Seloken.
Among AstraZeneca’s six product categories, revenues from three categories dwindled. While revenues from Gastrointestinal slipped 6%, Oncology and Infection and Other segments plunged 19% and 18%, respectively. The Respiratory and Inflammation segment booked the highest growth at 4%, with revenues from the Cardiovascular and Neuroscience segments experiencing an upside of 1% each.
AstraZeneca’s gross margin expanded 300 basis points (bps) to 84.0% in the first quarter of 2011. Lower payments to Merck and Co. Inc. (MRK) and amount received for settlement with PDL BioPharma Inc. (PDLI) led to the increase in gross margin.
Operating margin declined 30 bps to 44.4%, primarily due to higher research and development expenses as well as lower other income.
Restructuring Initiative
AstraZeneca has a restructuring program in place, with the first phase, which is now complete, costing the company $2.5 billion. AstraZeneca achieved annual synergies of $2.4 billion from this phase.
The second phase of the restructuring program commenced in January 2010. AstraZeneca expects to realize another $1.9 billion in annual savings by the end of 2014 from the second phase. Of the $1.9 billion, 50% is expected to be recognized in 2011, with most of the remainder in 2013.
For achieving the aforementioned savings, the company expects to incur costs of $2.0 billion; $1.2 billion of which was charged in 2010 and the rest is to be recorded in 2011.
During the first quarter of 2011, AstraZeneca incurred restructuring costs of $143 million.
Outlook for 2011 Raised
For 2011, AstraZeneca has increased its earnings guidance range by five cents and now expects earnings to range between $6.95 and $7.25 per share (old guidance range: $6.90–$7.20). The increase was primarily to include the impact of the benefit recognized from the settlement with PDL BioPharma.
The Zacks Consensus Estimate of $7.05 per share lies within the company’s guidance range.
Revenues for 2011 are expected to remain flat or experience a low single-digit decline compared with 2010 revenues at CER.
Our Take
We currently have a Neutral recommendation on AstraZeneca, which is supported by a Zacks #3 Rank (short-term Hold rating). We believe the cost-cutting program will aid earnings in the near term, but will not be enough to compensate for the continued revenue deterioration with several major drugs going off-patent.
We note that the company witnessed a revenue decline in the first quarter owing to generic erosion. In order to avoid further declines in the top line, AstraZeneca needs to deliver on its pipeline.
The company’s lead pipeline candidate, Brilinta (ticagrelor) for acute coronary syndrome, is currently under regulatory review in the US, with a target date set for July 20, 2011.
The drug is already approved under the trade name Brilique in 32 countries, including the European Union, Iceland and Norway among others.
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