Weak Second Quarter at AstraZeneca


AstraZeneca’s (AZN) second quarter 2012 core earnings of $1.53 per American Depositary Share (ADS) beat the Zacks Consensus Estimate of $1.39. Earnings were down 6% (at constant exchange rates [CER]) year over year. Lower revenues hurt earnings during the quarter.

AstraZeneca’s quarterly revenues fell 18% (at CER) year over year to $6.7 billion, primarily owing to intense generic competition. Revenues were short of the Zacks Consensus Estimate of $6.8 billion.

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

The Quarter in Detail

US revenues were down 29% in the second quarter of 2012, primarily due to generic competition for Seroquel IR. US healthcare reform negatively impacted second quarter revenues by $150 million. Revenues declined 12% in the Rest of the World (RoW).

The decline was primarily due to weaknesses in the Western European (down 20%) and the Established ROW (down 12%) markets. Revenues in the Emerging Markets witnessed a mere 1% growth in the reported quarter. Weak sales in Brazil and Mexico along with supply chain issues pulled down sales in the emerging markets.

The company expects emerging market sales to pick up in the remainder of the year. However, the company no longer expects double-digit growth in the emerging markets for 2012.

Generic competition impacted revenues by 15%. The drugs facing generic competition include Seroquel IR (down 75% to $277 million), Nexium (down 13% to $949 million), Arimidex (down 16% to $147 million), Seloken/Toprol-XL (down 7% to $208 million), Casodex (down 13% to $118 million), Atacand (down 25% to $269 million) and Merrem (down 33% to $100 million).

Crestor sales were also down 5% to $1.6 billion, primarily owning to the loss of exclusivity in Canada.

However, drugs such as Iressa (up 13% to $154 million), Synagis (up 15% to $55 million), Onglyza (up 72% to $79 million) and Faslodex (up 24% to $161 million) performed well during the quarter.

Brilinta sales were $18 million in the second quarter of 2012 compared with $9 million in the first quarter of 2012.

All six AstraZeneca product franchises dwindled in the second quarter of 2012. Revenues from Neuroscience (48%), Infection and Other (24%), Gastrointestinal (12%), Cardiovascular (7%), Oncology (1%) and Respiratory (1%) segments plunged.

Other Details

AstraZeneca’s core gross margin decreased 190 basis points (bps) to 79.9% in the second quarter of 2012 due to unfavorable product mix.

Core selling, general and administrative (SG&A) expenses went down 18% to $2.1 billion, primarily attributable to restructuring initiatives and lack of Astra Tech costs.

During the quarter, core research and development (R&D) expenses amounted to $1.1 billion, reflecting a decrease of 4%, attributable to restructuring initiatives.

The company announced an interim dividend of 90 cents and made net share repurchases of $1.6 billion in the first half of 2012.

2012 Outlook

For 2012, AstraZeneca maintains its adjusted earnings guidance range of $5.85 – $6.15 per ADS. The Zacks Consensus Estimate is pegged at $6.00 per share. Revenues are expected to decline in a low to mid-teens range compared with 2011 levels (at CER), due to government price intervention, generic competition coupled with the disposal of the Astra Tech business and the ongoing disposal of the Aptium unit.

Gross margin and R&D in 2012 are expected to decrease from the last year. Gross margin is expected stay above 80%. Net share repurchases are expected to be $4.5 billion during 2012.

Neutral on AstraZeneca

We are encouraged by AstraZeneca’s focus on high-potential emerging markets and are pleased with its effort to drive the bottom line through cost-cutting initiatives and share buybacks.

However, we remain concerned about the generic competition faced by the company’s key products. In 2011, the company lost revenues worth almost $2 billion to generic competition. The weak late-stage pipeline coupled with slow Brilinta uptake also bothers us.

We currently have a Neutral recommendation on AstraZeneca. The stock carries a Zacks #3 Rank (Hold rating) in the short run.

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