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AstraZeneca’s (AZN - Analyst Report) third quarter 2012 core earnings of $1.51 per American Depositary Share (ADS) beat the Zacks Consensus Estimate of $1.46. Earnings, however, were down 8% (at constant exchange rates [CER]) year over year. Lower revenues accounted for the decline in year-over-year earnings.

AstraZeneca’s quarterly revenues fell 15% (at CER) year over year to $6.7 billion, primarily owing to intense generic competition. The lack of Astra Tech and Aptium revenues resulted in revenue decline of 1.8 percentage points. Revenues, however, were above the Zacks Consensus Estimate of $6.6 billion.

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

The Quarter in Detail

US revenues were down 19% in the third quarter of 2012, primarily due to generic competition for Seroquel IR. The US healthcare reform negatively impacted third quarter revenues by $150 million.

Revenues declined 12% in the Rest of the World (RoW). The decline was primarily due to weakness in the Western European (down 20%) and the Established ROW (down 18%) markets. Revenues in Emerging Markets witnessed 6% growth in the reported quarter. Weak sales in Mexico pulled down sales in emerging markets by 2 percentage points.

The drugs facing generic competition include Seroquel IR (down 83% to $169 million), Nexium (down 6% to $995 million), Arimidex (down 22% to $130 million), Seloken/Toprol-XL (down 11% to $230 million), Casodex (down 16% to $111 million), Atacand (down 34% to $221 million) and Merrem (down 29% to $90 million).

Crestor sales were also down 3% to $1.5 billion, primarily owing to the loss of exclusivity in Canada.

However, drugs such as Iressa (up 11% to $154 million), Onglyza (up 42% to $84 million), Symbicort (up 11% to $785 million) and Faslodex (up 28% to $167 million) performed well during the quarter.

Brilinta sales were $24 million in the third quarter of 2012 compared with $18 million in the second quarter of 2012.

Five of the six product franchises at AstraZeneca dwindled in the third quarter of 2012. Respiratory segment revenues went up 8%, while revenues from the Neuroscience (51%), Infection and Other (6%), Cardiovascular (6%), Gastrointestinal (5%) and Oncology (2%) segments plunged.

Other Details

AstraZeneca’s core gross margin decreased 10 basis points (bps) to 81.1% in the third quarter of 2012 due to unfavorable product mix and increased royalty payments.

Core selling, general and administrative (SG&A) expenses went down 12% to $2.0 billion, primarily attributable to restructuring initiatives and the lack of Astra Tech costs.

During the quarter, core research and development (R&D) expenses amounted to $1.1 billion, reflecting a decrease of 3%, attributable to restructuring initiatives.

As previously announced in October 2012, AstraZeneca has suspended its share repurchase program. The company has repurchased shares worth $2.3 billion during 2012. The company was targeting net share repurchases of $4.5 billion in 2012.

2012 Outlook Maintained

For 2012, AstraZeneca maintained its adjusted earnings guidance range of $6.00 – $6.30 per ADS. The Zacks Consensus Estimate is pegged at $6.12 per share. Revenues are expected to decline in a low to mid-teens range compared with 2011 levels (at CER).

Gross margin in 2012 is expected to decrease from the last year. Gross margin is expected to stay above 80%.

The company is on track to deliver annual savings of $1.6 billion by the end of 2014.

Neutral on AstraZeneca

We are encouraged by AstraZeneca’s focus on the high-potential emerging markets. We are pleased with its efforts to expand its pipeline and portfolio through mergers and acquisitions.

The Ardelyx agreement, Ardea acquisition, the Amgen (AMGN - Analyst Report) collaboration and the expansion of the diabetes alliance with Bristol-Myers Squibb (BMY - Analyst Report), all represent the company’s efforts in this direction. We expect more such deals in the near term.

However, we remain concerned about the generic competition faced by the company’s key products. In 2011, the company lost revenues worth almost $2 billion to generic competition. The weak late-stage pipeline at AstraZeneca coupled with slow Brilinta uptake also bothers us.

We currently have a Neutral recommendation on AstraZeneca. The stock carries a Zacks #3 Rank (Hold rating) in the short run
 

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