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AstraZeneca’s (AZN - Analyst Report) second-quarter 2013 core earnings of $1.20 per American Depositary Share (ADS) beat the Zacks Consensus Estimate of $1.17. Earnings were down 21% (at constant exchange rates or CER) year over year. Earnings in the second quarter of 2012 reflect benefit from tax settlements.

AstraZeneca’s quarterly revenues fell 4% (at CER) year over year to $6.2 billion, primarily due to intense generic competition. Revenues were in line with the Zacks Consensus Estimate. The adverse effect of the genericization of products, which recently lost patent protection, was approximately $500 million.

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

The Quarter in Detail

U.S. revenues were down 4% in the second quarter of 2013 to $2.3 billion, primarily due to generic competition for Seroquel IR. U.S. healthcare reform negatively impacted second-quarter revenues and costs by $174 million.

Revenues declined 4% in the Rest of the World (RoW) to $4.0 billion. The decline was attributed to weakness in the European markets, which were down 13% primarily due to the loss of exclusivity on Seroquel IR, Atacand and Nexium.

Established ROW revenues were down 6%. Results were hurt by a 77% decline in Crestor sales in Canada as a result of generic competition and pricing pressure in Australia. Revenues in Emerging Markets witnessed 12% growth in the reported quarter fuelled by growth in China (21%).

The drugs facing generic competition include Seroquel IR (down 62% to $99 million), Arimidex (down 39% to $83 million), Casodex (down 7% to $96 million), Atacand (down 37% to $166 million), Losec/Prilosec (down 36% to $121 million), Seloken/Toprol-XL (down 12% to $183 million) and Merrem (down 18% to $81 million).

However, drugs such as Iressa (up 7% to $156 million), Onglyza (up 28% to $102 million), Symbicort (up 8% to $842 million), Pulmicort (up 4% to $213 million) and Faslodex (up 13% to $173 million) performed well during the quarter.

Brilinta sales were $65 million in the second quarter of 2013 compared with $51 million in the first quarter of 2013.

Other Details

AstraZeneca’s core gross margin increased 1.1 percentage points to 82.3% in the second quarter of 2013. Core selling, general and administrative (SG&A) expenses went up 6% to $2.2 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 $1.0 billion, reflecting an increase of 1%. Investments in pipeline were partially offset by savings from restructuring programs. Operating profit, as a percentage of sales, stood at 33.0%, down 2.3 percentage points.

2013 Outlook

2013 is a challenging year for AstraZeneca. The company continues to expect 2013 revenue to decline in the mid-to-high, single digit and core earnings to decline considerably more than revenue.

Generic competition has adversely impacted AstraZeneca’s revenues over the past few quarters. This has put significant pressure on the company. AstraZeneca is looking towards cost-cutting initiatives to drive the bottom line in the face of genericization.

The company expects to boost its pipeline by acquiring candidates. As a result, core operating costs are now expected to increase in the low-to-mid, single-digit range (previous guidance: slight increase).

In a bid to add late-stage candidates to its pipeline, AstraZeneca entered into a number of acquisition deals (Pearl Therapeutics and Omthera Pharmaceuticals) in the last few months and agreements with companies such as FibroGen, Inc.

AstraZeneca, a large cap biopharmaceutical company, carries a Zacks Rank #3 (Hold). However, another large cap pharma stock, Johnson & Johnson (JNJ - Analyst Report), currently looks better positioned with a Zacks Rank #2 (Buy).

Other companies in the pharma space that are worth considering include Biogen Idec Inc. (BIIB - Analyst Report) and Gilead Sciences Inc. (GILD - Analyst Report). Both carry a Zacks Rank #1 (Strong Buy).

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