AstraZeneca (AZN) reported third-quarter 2011 core adjusted earnings of $1.71 per American Depositary Share (ADS), above the Zacks Consensus Estimate of $1.68 and the year-ago earnings of $1.50.
Earnings were driven by share repurchases, lower tax rate and lower net finance expense. Including one-time items, earnings came in at $2.56, up 140% (at constant exchange rates [CER]) year-over-year, benefiting from the Astra Tech sale.
AstraZeneca’s quarterly revenues slid 2% (at CER) year over year to $8.2 billion, owing to intense generic competition and government price interventions. However, revenues were in line with the Zacks Consensus Estimate. All growth rates mentioned below are on a year-on-year basis and at constant exchange rates.
Pricing pressure due to the US healthcare reform negatively impacted revenues by approximately 3.5%. US revenues remained flat in the third quarter of 2011. The RoW market saw a decline of 3%, primarily driven by a 15% slip in Western Europe, partly offset by a 7% increase in both Emerging Markets and Established Rest of World.
Generic competition impacted revenues by more than $350 million. The drugs facing generic competition include Nexium (down 16% to $1.09 billion), Arimidex (down 44% to $176 million), Seloken/Toprol-XL (down 4% to $273 million), Casodex (down 9% to $137 million) and Merrem (down 37% to $139 million).
The decline in revenues from these products more than offset the strong sales of Crestor (up 14% to $1.66 billion), Iressa (up 29% to $145 million), Seroquel XR (up 24% to $366 million), Symbicort (up 9% to $755 million) and Faslodex (up 57% to $139 million).
Brilinta sales were $13 million in the third quarter 2011 out of which $11 million was due to initial stocking in the US.
Among AstraZeneca’s six product franchises, revenues from three categories dwindled. While revenues from Gastrointestinal slipped 15%, Oncology and Infection and Other segments plunged 4% and 21%, respectively. The cardiovascular segment booked the highest growth at 9%, with the Inflammation and Neuroscience segments experiencing an upside of 4% and 2% respectively.
Other Details
AstraZeneca’s core gross margin increased 120 basis points (bps) to 80.4% in the third quarter of 2011. Gross margin in the third quarter 2010 was hit by intangible impairment charges.
Core selling, general and administrative (SG&A) expenses went down 2% to $2.4 billion, primarily due to operating efficiencies in established markets partially offset by US healthcare reform tax.
During the quarter, core research and development (R&D) expenses amounted to $1.15 billion, reflecting an increase of 10%, due to investment in the late stage pipeline and biologics and marginally higher intangible asset impairment charges.
2011 Outlook Raised
AstraZeneca increased its 2011 earnings guidance range and now expects earnings to range between $7.20 and $7.40 per share (previous guidance range: $7.05-$7.35). The increase was primarily due to the positive impact of exchange rate movements. The Zacks Consensus Estimate for 2011 currently stands at $7.31, within the guidance range provided by the company.
Revenues for 2011 are expected to remain flat or experience a low single-digit decline compared with 2010 revenues at CER. Competition in the cardiovascular market will increase with the entry of generic versions of Pfizer’s (PFE) Lipitor later this year.
Meanwhile, AstraZeneca expects core gross margin for 2011 to be higher than the year-ago figure and projects core SG&A expenses to remain flat at CER.
During the first nine months 2011, AstraZeneca repurchased shares worth $3.88 billion. The company expects to purchase shares worth $5 billion in 2011 – we expect AstraZeneca to utilize the proceeds from the Astra Tech sale for this purpose.
Neutral on AstraZeneca
We currently have a Neutral recommendation on AstraZeneca, which carries a Zacks #3 Rank (short-term Hold rating). 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. Meanwhile, the weak late-stage pipeline at AstraZeneca also bothers us. Consequently, we prefer to remain on the sidelines.
