AstraZeneca plc (AZN) reported second-quarter fiscal 2011 core earnings of $1.73 per American Depositary Share (ADS), missing the Zacks Consensus Estimate of $1.77 and the year-ago earnings of $1.79. Earnings slipped as a result of lower revenues and higher operating expenses. Including one-time items, earnings came in at $1.53, up 3% (at constant exchange rates [CER]) over the year-ago period.
Revenues
AstraZeneca’s quarterly revenues slid 2% (at CER) year over year to $8.4 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.
Generic competition for major products in the US led to a 3% slide in US revenues. The Rest of the World (RoW) market also saw a decline of 1%, primarily driven by a 9% slip in Western Europe, partly offset by a 10% increase in the Emerging Markets and a 4% hike in Established Rest of World.
The drugs facing generic competition include Nexium (down 14% to $1.12 billion), Arimidex (down 62% to $181 million), Toprol-XL (down 29% to $232 million), Casodex (down 17% to $138 million) and Merrem (down 24% to $158 million). The decline in revenues from these products more than offset the strong sales of Crestor (up 15% to $1.71 billion), Iressa (up 38% to $139 million), Seroquel XR (up 23% to $387 million), Symbicort (up 14% to $802 million) and Faslodex (up 63% to $135 million).
RoW revenues were boosted mainly by robust volume growth of products like Crestor, Symbicort, Nexium, Seroquel XR, Iressa and Faslodex.
Among AstraZeneca’s six product franchises, revenues from three categories dwindled. While revenues from Gastrointestinal slipped 14%, Oncology and Infection and Other segments plunged 19% and 15%, respectively. The Respiratory and Inflammation and Neuroscience segments booked the highest growth at 7% each, with revenues from the Cardiovascular segment experiencing an upside of 5%.
Other Details
AstraZeneca’s gross margin increased 10 basis points (bps) to 82.7% in the second quarter of 2011. Higher royalty payments to Merck and Co. Inc. (MRK) were more than offset by positive exchange rate movements leading to an upside at CER.
Selling, general and administrative (SG&A) expenses went up 9% to $2.63 billion, primarily due to excise tax arising from US healthcare reform, product launches and investment in Emerging Markets.
During the quarter, research and development (R&D) expenses amounted to $1.12 billion, reflecting an increase of 8%, due to investment in late stage pipeline and Biologics.
Restructuring Initiative
AstraZeneca’s restructuring program is in place and the company incurred $2.5 billion in the first phase. Also, AstraZeneca achieved annual synergies of $2.4 billion from this phase.
The second phase of the restructuring program commenced in January 2010. AstraZeneca expects to realize another $1.9 billion in annual savings by the end of 2014 from the second phase. Of the $1.9 billion, 50% is expected to be recognized in 2011, with most of the remainder to be recognized in 2013.
For achieving the aforementioned savings, the company expects to incur costs of $2.0 billion; $1.2 billion of which was charged in 2010 and the rest is to be recorded in 2011.
During the second quarter of 2011, AstraZeneca incurred restructuring costs of $138 million, leading to $281 million of restructuring costs incurred in the first half of 2011.
Outlook for 2011 Raised
For 2011, AstraZeneca has increased its earnings guidance range by a dime and now expects earnings to range between $7.05 and $7.35 per share (previous guidance range: $6.95–$7.25). The increase was primarily due to the positive impact of share repurchases and exchange rate movements.
The Zacks Consensus Estimate of $7.17 per share lies within the company’s guidance range.
Revenues for 2011 are expected to remain flat or experience a low single-digit decline compared with 2010 revenues at CER.
Further, AstraZeneca expects gross margin for 2011 to be higher than the year-ago figure and projects SG&A expenses to remain flat at CER.
Our Take
We currently have a Neutral recommendation on AstraZeneca. The stock carries a Zacks #3 Rank (Hold rating) in the short-run. We believe the cost-cutting program will aid earnings in the near term, but will not be enough to compensate for the continued revenue deterioration with several major drugs losing patent protection.
We note that the company witnessed a revenue decline in the second quarter owing to generic erosion. In order to avoid further declines in the top line, AstraZeneca needs to deliver on its pipeline.
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