AstraZeneca (AZN) reported fourth-quarter 2011 core adjusted earnings of $1.61 per American Depositary Share (“ADS”), a penny above the Zacks Consensus Estimate of $1.60. Earnings were up 12% (at constant exchange rates [CER]) year over year, benefiting from share repurchases, lower tax rate and lower net finance expense.

AstraZeneca’s quarterly revenues remained flat (at CER) year over year at $8.7 billion, owing to intense generic competition and government price interventions. However, revenues were just above the Zacks Consensus Estimate of $8.6 billion.

Full year earnings came in at $7.28 per share, ahead of the Zacks Consensus Estimate of $7.25 and 7% (at CER) above the year-ago earnings. Full year revenues fell 2% (at CER) to $33.6 billion, just above the Zacks Consensus Estimate of $33.5 billion.

All growth rates mentioned below are on a year-on-year basis and at constant exchange rates.

The Quarter in Detail

Pricing pressure due to the US healthcare reform negatively impacted fourth quarter revenues by approximately 3.2%. US revenues were up 5% in the fourth quarter of 2011. The Rest of the World (RoW) market saw a decline of 3%, primarily due to a 15% slip in Western Europe, partly offset by a 10% increase in Emerging Markets and a 3% increase in Established Rest of World.

Generic competition impacted revenues by approximately $450 million. The drugs facing generic competition include Nexium (down 13% to $1.07 billion), Arimidex (down 42% to $166 million), Seloken/Toprol-XL (down 5% to $236 million), Casodex (down 9% to $142 million) and Merrem (down 35% to $114 million).

The decline in revenues from these products was offset by strong sales of Crestor (up 11% to $1.77 billion), Iressa (up 25% to $149 million), Seroquel XR (up 27% to $398 million), Symbicort (up 13% to $839 million) and Faslodex (up 35% to $149 million).

Brilinta sales were $5 million in the fourth quarter 2011 compared to $13 million in the third quarter.

Among AstraZeneca’s six product franchises, revenues from three categories dwindled. While revenues from Oncology slipped 9%, both Gastrointestinal and Infection and Other segments plunged 9%. The Neuroscience segment booked 10% growth, while the Cardiovascular and Respiratory and Inflammation segments recorded 7% growth each.

Other Details

AstraZeneca’s core gross margin increased 90 basis points (bps) to 81.8% in the fourth quarter of 2011, reflecting a favorable revenue mix and the positive impact from the Astra Tech sale.

Core selling, general and administrative (“SG&A”) expenses went down 12% to $2.5 billion, primarily due to lower advertising costs and the disposal of Astra Tech.

Core Pre-R&D operating margin was up 3.5% to 54.0%, reflecting higher gross margin and lower SG&A costs.

During the quarter, core research and development (“R&D”) expenses amounted to $1.69 billion, reflecting an increase of 31%, due to higher intangible impairment charges and investment in the pipeline.

AstraZeneca’s Board has recommended a second interim dividend of $1.95 per share, which brings the full dividend to $2.80 per share, up 10%.

Job Cuts Announced

AstraZeneca announced new restructuring initiatives to improve efficiency and deliver better results. AstraZeneca expects to realize an annual benefit of $1.6 billion by the end of 2014, by incurring total costs of $2.1 billion. This restructuring will result in approximately 7,300 job cuts. (SG&A: 3,750, R&D: 3,750 and Operations: 1,350)

AstraZeneca already has a restructuring program in place. In the first phase of the restructuring program, the company achieved annual benefits of $2.4 billion by the end of 2010 at a cost of $2.5 billion incurred between 2007 and 2009. In this phase, approximately 12,600 positions were reduced.

The second phase of the restructuring program was announced in January 2010. In this phase, AstraZeneca aims to deliver additional annual savings of $1.9 billion by 2014 at a cost of $2.1 billion. While annual savings of $1.0 billion has already been achieved by the end of 2011, restructuring charges of $1.2 billion and $0.9 billion were incurred in 2010 and 2011, respectively. The implementation of the second phase of the program will result in approximately 9,000 job cuts.

2012 Outlook

For 2012, AstraZeneca expects earnings per share to range from $6.00 to $6.30. The Zacks Consensus Estimate of $6.16 is within the company’s guidance range. Revenues are expected to decline in a low double-digit range compared with 2011 revenues at CER, due to government price intervention and generic competition.

Further, gross margin is anticipated to be above 80% but below the 2011 gross margin. Pre-R&D operating margin is forecast to lean toward the higher end of the guidance range of 48% to 54% of revenue, albeit a little lower than the 2011 figure.

The company plans net share repurchases of $4.5 billion in 2012.

Long-Term Outlook

AstraZeneca also reaffirmed its outlook for 2010 – 2014. AstraZeneca maintained the revenue guidance range of $28 billion to $34 billion each year in the 2010-2014 time period. However, revenues in 2012-2014 expected to lie in the lower half of the range. The company expects double-digit revenue growth from emerging markets.

The company expects pre-R&D operating margin to amount to 48% – 54% of total revenue per annum. The company plans to reinvest 40% – 50% percent of its pre-R&D post tax cash flow in internal and external R&D and capital investment.

AstraZeneca lowered the anticipated contribution from recently launched products as well as pipeline products, which could be marketed over time, to $2 billion – $4 billion, revised from the previous guidance range of $3 billion – $5 billion. One of the reasons for the lowered guidance was a Complete Response Letter (“CRL”) issued by US Food and Drug Administration (“FDA”) for AstraZeneca’s key pipeline candidate, dapagliflozin, triggered this reduction.

Neutral on AstraZeneca

We currently have a Neutral recommendation on AstraZeneca. The stock carries a Zacks #3 Rank (Hold rating) in the short run. Even though we are encouraged by the strong cardiovascular franchise at AstraZeneca and the company’s focus on the high-potential emerging markets, we remain concerned about the generic competition faced by its key products. The company is looking to lessen the impact of genericization by reducing its cost structure through restructuring initiatives.

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