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AstraZeneca (AZN - Analyst Report) reported second-quarter 2014 core earnings of $1.30 per American Depositary Share (ADS) beating the Zacks Consensus Estimate of $1.13. Earnings were also up 13% (at constant exchange rates or CER) year over year buoyed by higher revenues and lower taxes.

AstraZeneca’s quarterly revenues increased 4% (at CER) year over year to $6.5 billion. Revenues were above the Zacks Consensus Estimate of $6.2 billion. Strong performance at key growth platforms (Brilinta, diabetes, respiratory, Emerging Markets and Japan) benefited revenues.

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

The Quarter in Detail

U.S. revenues were up 8% in the second quarter to $2.4 billion, reflecting improvement in Crestor sales and diabetes revenues.

Revenues grew 1% in Rest of the World (RoW) to $4 billion. The increase was attributed to 11% growth in Emerging Markets, driven by strong sales in China (up 23%).

European markets remained flat with generic erosion completely offsetting the impact of the inclusion of diabetes revenues and Brilinta (EU trade name: Brilique). Established RoW revenues were down 9%. Revenues continued to be hurt by weak Crestor sales in Australia. Revenues in Japan decreased 9%.

Nexium, which generated more than 15% of AstraZeneca’s total revenues in 2013, is expected to face generic competition Oct 2014. Earlier, it was anticipated that Nexium would start facing generic competition from May.

We are impressed with the performance of drugs such as Onglyza (up 131% to $238 million), Symbicort (up 9% to $928 million), Bydureon (up 247% to $112 million), Byetta (up 61% to $88 million) and Faslodex (up 3% to $179 million).

Sales from Brilinta, a key area of focus, were $117 million in the reported quarter compared with $99 million in the preceding quarter. Brilinta performed well in Europe and the emerging markets.

Other Details

AstraZeneca’s core gross margin decreased 0.2 percentage points to 82.1% in the second quarter of 2014. Core selling, general and administrative (SG&A) expenses increased 13% to $2.5 billion, primarily due to investments in Emerging Markets, diabetes franchise and Farxiga launch.

During the quarter, core research and development expenses increased 12% to $1.2 billion, reflecting higher investments in pipeline.

Outlook Raised

AstraZeneca now expects revenues to be in line year over year in 2014. Previously, the company had guided a decline in low-to-mid single digits.

The company expects core earnings to decrease in low double digits (previous guidance: decline in the teens). The 2014 Zacks Consensus Estimate is at $4.36 per share.  

Our Take

AstraZeneca’s second-quarter results were impressive with both earnings and revenues beating our expectation. Generic competition has adversely impacted AstraZeneca’s revenues over the past few quarters and is expected to do so in the coming years (Nexium and Crestor). This has put significant pressure on the company. AstraZeneca is resorting to cost-cutting initiatives to drive the bottom line in the face of genericization.

We are nonetheless pleased with recent approvals at AstraZeneca. The approvals of Epanova (hypertriglyceridaemia), Forxiga (type II diabetes), Myalept (complications of leptin deficiency, in addition to diet, in patients with congenital generalized or acquired generalized lipodystrophy) in the U.S. and Xigduo (type II diabetes) in the EU were major milestones for the company. These new product approvals will boost the top line, thereby driving growth.

AstraZeneca is also working on expanding its pipeline through merger and acquisition. A couple of days back, AstraZeneca announced that it has entered into an agreement to acquire Almirall’s respiratory franchise for an upfront payment of $875 million and up to $1.22 billion in development, launch and sales-related milestones. The transaction is expected to close by the end of 2014.

Meanwhile, speculations are ongoing that Pfizer Inc. (PFE - Analyst Report), which was looking to acquire AstraZeneca earlier this year, will make a renewed attempt in late November.  

AstraZeneca carries a Zacks Rank #1 (Strong Buy). Other stocks worth considering in the healthcare sector include Allergan Inc. (AGN - Analyst Report) and Mallinckrodt (MNK - Snapshot Report). Both hold the same Zacks Rank as AstraZeneca.

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