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AstraZeneca’s (AZN - Analyst Report) third-quarter 2013 core earnings of $1.21 per American Depositary Share (ADS) missed the Zacks Consensus Estimate of $1.28. Earnings were also down 26% (at constant exchange rates or CER) year over year.

AstraZeneca’s quarterly revenues fell 4% (at CER) year over year to $6.3 billion, primarily due to intense generic competition. Revenues were below the Zacks Consensus Estimate of $6.5 billion. The adverse effect of the genericization of products, which recently lost patent protection, was approximately $350 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 8% in the third quarter to $2.4 billion, primarily due to generic competition and inventory destocking (Crestor and Nexium). Additionally, U.S. healthcare reforms impacted revenues and costs by $199 million.

Revenues declined 2% in Rest of the World (RoW) to $3.9 billion. The decline was attributed to weakness in the European markets, which were down 4% primarily due to generic erosion of Seroquel IR, Seroquel XR, Atacand and Nexium.

Established RoW revenues were down 8%. Results were hurt by weak Crestor sales in Canada (42%) and Australia (68%) and Nexium in Canada due to generic competition. Revenues in Emerging Markets witnessed 5% growth in the reported quarter. China (up 13%) experienced slower growth due to inventory destocking.

Drugs facing generic competition include Seroquel IR (down 47% to $84 million), Seroquel XR (down 10% to $339 million), Arimidex (down 26% to $90 million), Casodex (down 5% to $93 million), Atacand (down 35% to $143 million), Losec/Prilosec (down 34% to $118 million), Nexium (down 5% to $918 million), Crestor (down 11% to $1.4 billion), Seloken/Toprol-XL (down 23% to $173 million) and Merrem (down 23% to $67 million).

However, drugs such as Iressa (up 12% to $165 million), Onglyza (up 10% to $93 million), Symbicort (up 7% to $839 million), FluMist (up 30% to $188 million), Synagis (up 35% to $130 million) and Faslodex (up 3% to $169 million) performed well during the quarter.

Newly launched Brilinta sales were $75 million in the third quarter of 2013 compared with $65 million in the preceding quarter. Other newly launched products including Bydureon, Forxiga and Vimovo contributed $43 million, $3 million and $23 million, respectively to total revenues during the quarter.

Other Details

AstraZeneca’s core gross margin decreased 120 basis points to 82.4% in the third quarter of 2013. Core selling, general and administrative (SG&A) expenses went up 11% 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 $1.1 billion, reflecting an increase of 7%. Investments in pipeline were partially offset by savings from restructuring programs.

Outlook

AstraZeneca continues to expect 2013 revenue to decline in mid-to-high single digits and core earnings to decline considerably more than revenues. For 2013, the company expects a high single-digit growth rate in Emerging Markets.

Generic competition has adversely impacted AstraZeneca’s revenues over the past few quarters. 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.

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

In a bid to bolster its pipeline, AstraZeneca made several acquisitions (Spirogen, Amplimmune, Pearl Therapeutics and Omthera Pharmaceuticals) in the last few months and forged agreements with companies such as Merck & Co. Inc. (MRK - Analyst Report), ADC Therapeutics, Johnson & Johnson (JNJ - Analyst Report) and FibroGen, Inc.

AstraZeneca, a large cap biopharmaceutical company, currently carries a Zacks Rank #3 (Hold). However, large cap pharma stock like Johnson & Johnson and Bayer (BAYRY - Analyst Report), currently look better-positioned with a Zacks Rank #2 (Buy).

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