AstraZeneca Revenues Disappoint - Analyst Blog

AstraZeneca plc's (AZN) fourth-quarter earnings came in at $1.39 per American Depositary Share (ADS), six cents above the Zacks Consensus Estimate but 2% below the year-ago figure of $1.42. Full year earnings came in at $6.71, well ahead of the Zacks Consensus Estimate of $6.62 and 6% above the year-ago earnings of $6.32.

Lower revenues led to the decline in fourth quarter earnings.

Revenues

Fourth quarter revenues declined 4% year over year to $8.6 billion. Revenues were, however, slightly above the Zacks Consensus Estimate of $8.3 billion. Full year revenues grew 1% to $33.3 billion, little above the Zacks Consensus Estimate of $33 billion.

Generic competition for major products in the US and the absence of H1N1 pandemic influenza vaccine revenue led to a 12% decline in US revenues. This decrease more than offset the 5% (at constant exchange rates [CER]) revenue increase, experienced in the Rest of the World (RoW).

The drugs facing generic competition in the US include Pulmicort Respules (down 39% CER to $233 million), Arimidex (down 43% CER to $278 million), Toprol-XL (down 22% CER to $253 million) and Casodex (down 24% CER to $148 million).

The decline in revenues due to these products more than offset the strong sales growth of Crestor (up 26% CER to $1.59 billion), Seroquel XR (up 47% CER to $316 million) and Symbicort (up 15% at CER to $741 million).

RoW revenues were boosted mainly due to robust volume growth of products like Crestor, Seroquel XR and Symbicort.

Among AstraZeneca's six product categories, revenues from four categories dwindled. While revenues from Gastrointestinal and Respiratory and Inflammation slid 3% and 7% (at CER), respectively, Oncology and Infection & Other segments suffered a steeper decline of a respective 16% and 31% (at CER). The Cardiovascular segment booked the highest growth at 12% (at CER) with revenues from the Neuroscience segment increasing 5% (at CER).

Margins

AstraZeneca's gross margin declined 110 basis points (bps) to 80.0% for the fourth quarter. Although the company made lower payments to Merck & Co. Inc. (MRK), higher royalty payments and adverse product and regional mix led to the decline in gross margin. Operating margin improved 30 bps to 33.2%, mainly due to lower selling, general and administrative expenses and higher other income.

Restructuring Initiative

AstraZeneca has a restructuring program in place, with the first phase, now complete, costing AstraZeneca $2.5 billion. The company 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 million 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 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; the rest to be recorded in 2011.

Outlook

Long-Term

AstraZeneca anticipates revenue in the range of $28 billion to $34 billion each year in the 2010-2014 time period. Revenues in 2014 would come somewhere in the middle of the range. Further, the company expects pre-R&D operating margin to amount to 48% – 54% of total revenue, per annum.

During the 2010-2014 time frame, AstraZeneca forecasts contribution from recently launched products as well as pipeline products, which could be marketed over time, in a range of $3 billion to $5 billion, revised from the previous guidance range of $4 billion to $6 billion.

2011

For 2011, AstraZeneca expects earnings per share to range from $6.45 to $6.75. Revenues are expected to remain flat or experience a low single-digit decline compared with 2010 revenues at CER.

Further, gross margin is anticipated to be above 80% but below the 2010 gross margin. Pre-R&D operating margin is forecast to lean toward the higher end of the guidance range of 48% to 54% of revenue, albeit a little lower than the 2010 figure.

US healthcare reform is expected to reduce 2011 revenues by about $700 million, with European pricing austerity expected to impact revenues in the mid single-digit percentage range.

Our Take

We currently have a Neutral recommendation on AstraZeneca, which is supported by a Zacks #3 Rank (Hold). We believe the cost-cutting program will aid earnings in the near term, but will not be enough to compensate for continued revenue deterioration with several major drugs going off-patent.

We note that the company saw a revenue decline in the fourth quarter owing to generic erosion. In order to avoid further declines in the top line, AstraZeneca needs to deliver on its pipeline.

The company's lead pipeline candidate, Brilinta (ticagrelor) for acute coronary syndrome, is currently under regulatory review in the US, with AstraZeneca having filed a response to the complete response letter issued by the US Food and Drug Administration (FDA) in December last year.

The drug is already approved under the trade name Brilique in 30 countries including the European Union, Iceland and Norway among others.

 
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