AstraZeneca’s (AZN) fourth-quarter 2013 core earnings of $1.23 per American Depositary Share (ADS) missed the Zacks Consensus Estimate of $1.28. Earnings were also down 25% (at constant exchange rates or CER) year over year. Investors reacted negatively to the news with the stock falling 1.42%.
AstraZeneca’s quarterly revenues fell 4% (at CER) year over year to $6.8 billion, primarily due to intense generic competition. Revenues were below the Zacks Consensus Estimate of $6.9 billion.
2013 earnings per ADS came in at $5.05, down 23% year over year. Full year earnings were below the Zacks Consensus Estimate of $5.07. Revenues for 2013 were $25.7 million, down 6% (at CER) year over year. The adverse effect of the genericization of products was approximately $2.2 billion. The Zacks Consensus Estimate for 2013 stood at $25.8 billion.
All growth rates mentioned below are on a year-on-year basis and at CER.
The Quarter in Detail
U.S. revenues were down 7% in the fourth quarter to $2.6 billion, primarily due to generic competition and the impact of Medicare Coverage Gap liability on Crestor and Nexium. Additionally, U.S. healthcare reforms impacted revenues and costs by $318 million.
Revenues declined 2% in Rest of the World (RoW) to $4.2 billion. The decline was attributed to weakness in the European markets, which were down 2% primarily due to generic erosion of Seroquel IR, Merrem, Atacand and Nexium.
Established RoW revenues were down 10%. Results were hurt by weak Crestor and Atacand sales in Australia and weak Seroquel XR, Nexium and Crestor sales in Canada due to generic competition. Revenues in Emerging Markets witnessed 6% growth in the reported quarter, driven by strong sales in China (up 21%).
Drugs facing generic competition include Seroquel IR (down 64% to $35 million), Seroquel XR (down 12% to $337 million), Arimidex (down 23% to $86 million), Casodex (down 4% to $95 million), Atacand (down 33% to $134 million), Losec/Prilosec (down 18% to $122 million), Nexium (down 3% to $991 million), Crestor (down 8% to $1.5 billion), Seloken/Toprol-XL (down 32% to $170 million) and Merrem (down 25% to $77 million).
However, drugs such as Iressa (up 5% to $158 million), Onglyza (up 6% to $93 million), Symbicort (up 11% to $976 million), FluMist (up 56% to $50 million), Synagis (up 2% to $515 million), Byetta (up 17% to $54 million) and Faslodex (up 6% to $182 million) performed well during the quarter.
Newly launched Brilinta sales were $92 million in the fourth quarter of 2013 compared with $75 million in the preceding quarter. Brilinta revenues in the U.S. were impacted in the latter part of 2013 by an announcement of a Civil Investigative Demand related to the PLATO trial, based on which the drug was approved. Other newly launched products including Bydureon, Forxiga and Vimovo contributed $49 million, $3 million and $24 million, respectively, to total revenues during the quarter.
Other Details
AstraZeneca’s core gross margin decreased 240 basis points to 81.2% in the fourth quarter of 2013. Core selling, general and administrative (SG&A) expenses went up 14% to $2.5 billion, primarily due to investments in Emerging Markets, Brilinta and the diabetes franchise.
During the quarter, core research and development (R&D) expenses amounted to $1.2 billion, reflecting an increase of 2%. Investments in pipeline were partially offset by savings from restructuring programs.
The company has expanded the fourth phase of the restructuring program to reduce cost and increase flexibility. The expanded program will deliver savings of $300 million by the end of 2016 in addition to savings of $800 million per annum expected earlier. This should also drive the bottom line.
Disappointing Outlook
AstraZeneca expects 2014 revenues to decline in low-to-mid single digits. The Zacks Consensus Estimate for 2014 stood at $25.3 billion.
The company expects core earnings to decline in the teens. The pre-earnings 2014 Zacks Consensus Estimate stood at $4.50 per share, representing a 10.9% decline on a year-over-year basis.
Nexium, which accounted for more than 20% of the company’s revenues in the U.S. in 2013, is set to go off-patent in May 2014. Additionally, Crestor, another key product at the company, will start facing generic competition in the U.S. from mid 2016.
In the long run the company expects 2017 revenues to be broadly in line with 2013.
Our Take
AstraZeneca’s fourth quarter results were below our expectations with the company missing the Zacks Consensus Estimate for both earnings and revenues. Additionally, we are disappointed with the lackluster earnings guidance for 2014.
Generic competition has adversely impacted AstraZeneca’s revenues over the past few quarters and is expected to do so in the coming years. This has put significant pressure on the company. AstraZeneca is looking toward cost-cutting initiatives to drive the bottom line in the face of genericization.
We are nonetheless pleased with AstraZeneca’s efforts to boost its pipeline. The company has almost doubled the number of late-stage (phase III or regulatory review) candidates to 11. By the end of 2015, the company plans to initiate phase III studies on 19 candidates.
AstraZeneca has been quite active in its acquisition efforts, which is encouraging. We are positive on the Bristol-Myers deal under which AstraZeneca gained rights to major diabetes products. AstraZeneca made several acquisitions (Spirogen, Amplimmune, Pearl Therapeutics and Omthera Pharmaceuticals) in the last few quarters and forged agreements with companies such as Merck & Co. Inc. (MRK), ADC Therapeutics, Johnson & Johnson (JNJ) and FibroGen, Inc. in a bid to bolster its pipeline.
AstraZeneca carries a Zacks Rank #3 (Hold). Some better-ranked stocks include Allergan Inc. (AGN). Allergan holds a Zacks Rank #2 (Buy).
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