Weak 1Q at AstraZeneca, CEO Quits - Analyst Blog


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AstraZeneca ( AZN ) reported first quarter 2012 core adjusted earnings of $1.81 per American Depositary Share ( ADS ), 4 cents below the Zacks Consensus Estimate. Earnings were down 19% (at constant exchange rates [CER]) year over year. Higher tax rate hurt earnings during the quarter.

AstraZeneca's quarterly revenues fell 11% (at CER) year over year to $7.3 billion, owing to intense generic competition. Revenues were much below the Zacks Consensus Estimate of $7.9 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 12% in the first quarter of 2012, primarily due to generic competition for Seroquel IR and US healthcare reform. US healthcare reform negatively impacted first quarter revenues by $205 million. Revenues declined 11% in Rest of the World (RoW). The decline was primarily due to weaknesses in the Western European (down 19%) and the Established ROW (down 9%) markets. Revenues in the Emerging Markets witnessed a mere 1% growth in the reported quarter. Weak sales in Brazil (down 15%), Turkey (down 18%) and Mexico (down 25%) pulled down sales in the emerging markets. The company expects sales to pick up in the upcoming quarters of 2012.

Generic competition impacted revenues by 8%. The drugs facing generic competition include Seroquel IR (down 25% to $754 million), Nexium (down 18% to $953 million), Arimidex (down 39% to $144 million), Seloken/Toprol-XL (down 8% to $224 million), Casodex (down 17% to $113 million) and Merrem (down 40% to $100 million).

However, drugs such as Iressa (up 17% to $143 million), Seroquel XR (up 14% to $384 million), Onglyza (up 106% to $72 million) and Faslodex (up 24% to $151 million) performed well during the quarter.

Sales of Crestor increased 2% to $1.5 billion. Brilinta sales were $9 million in the first quarter 2012 compared with $5 million in the fourth quarter of 2011.

Among AstraZeneca's six product franchises, revenues from five categories dwindled while one remained flat. Revenues from Infection and Other (19%), Gastrointestinal (18%), Neuroscience (16%), Oncology (7%) and Respiratory (5%) segment plunged. Cardiovascular segment revenues remained unchanged.

Other Details

AstraZeneca's core gross margin decreased 190 basis points (bps) to 82% in the first quarter of 2012. Core gross margin in first quarter 2011 was boosted due to settlement of patent disputes with PDL BioPharma ( PDLI ).

Core selling, general and administrative (SG&A) expenses went down 9% to $2.1 billion, primarily attributable to lower advertising costs and restructuring initiatives.

During the quarter, core research and development (R&D) expenses amounted to $1.1 billion, reflecting an increase of 2%, due to higher intangible impairment charges relating to TC-5214.

The company made dividend payments of $2.5 billion and net share repurchases of $912 million in the reported quarter.

CEO Quits

Along with the first quarter 2012 results, AstraZeneca announced that David Brennan, the company's Chief Executive Officer ( CEO ) and Board member, has decided to step down. David Brennan will retire from his responsibilities effective June 1, 2012. Simon Lowth, currently the Executive Director and Chief Financial Officer (CFO) at AstraZeneca, will serve as interim CEO until a permanent successor is found.

The news of retirement along with the weak quarter had a negative impact on the stock price.

2012 Outlook

For 2012, AstraZeneca lowered its adjusted earnings guidance range to $5.85 - $6.15 from $6.00 - $6.30. The Zacks Consensus Estimate is pegged at $6.30 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.

Neutral on AstraZeneca

We are encouraged by the company's focus on the high-potential emerging markets and are pleased with the company's effort to drive the bottom line through cost-cutting initiatives and share buybacks. We are pleased with AstraZeneca's effort to expand its pipeline through the collaboration with Amgen Inc. ( AMGN ) for the joint development and commercialization of five monoclonal antibodies in Amgen's pipeline.

However, we remain concerned about the generic competition faced by its key products. The weak late-stage pipeline coupled with the 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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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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