AstraZeneca (AZN) recently raised its core earnings guidance following the settlement of certain matters with the UK and US tax authorities. Based on its settlement agreements with the tax authorities, the company expects a lower tax rate.
The agreement with the tax authorities relates to transfer pricing issues in connection with AstraZeneca’s US business over a 13-year period (2002 – 2014). In addition to this, the company entered into an agreement with the US tax authorities regarding a valuation matter in 2000 following the global AstraZeneca merger.
2011 Tax Rate Lowered
Per the terms of the agreements, AstraZeneca will have to pay $1.1 billion to the tax authorities in 2011. With the net amount being lower than expected, the company expects to release about $500 million from the provision it had set up for these payments. The amount will be recognized in the first quarter of 2011, providing a boost to earnings.
Moreover, the company expects a 6% cut in its effective tax rate for 2011. As a result, the company is now guiding towards an effective tax rate of 21% instead of its earlier guidance of 27%.
Based on these adjustments, AstraZeneca now expects core EPS of $6.90-$7.20, well above its earlier guidance of $6.45-$6.75. The Zacks Consensus Estimate for 2011 currently stands at $6.73.
We expect a significant upward revision in estimates based on the revised guidance provided by the company. First quarter earnings estimates should also increase. The Zacks Consensus Estimate for the first quarter currently stands at $1.81.
Neutral on AstraZeneca
We currently have a Neutral recommendation on AstraZeneca, supported by a Zacks #3 Rank (short-term “Hold” rating). While the resolution of the transfer pricing issue removes a major overhang from the shares, we remain concerned about the generic competition or generic risk being faced by several products in the 2010 to 2013 time frame. AstraZeneca is facing patent challenges from generic companies like Teva (TEVA) and Mylan (MYL) among others for certain products.
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