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AstraZeneca's (AZN) Q1 Earnings & Sales Miss, Stock Down

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AstraZeneca plc (AZN - Free Report) missed the Zacks Consensus Estimate for both earnings and sales in the first quarter of 2018 hit by declining sales of its cholesterol drug, Crestor. The Swiss pharma giant maintained its previously issued outlook for 2018. The stock declined more than 2% in pre-market trading on Friday.

This year so far, AstraZeneca’s shares have risen 5.0% against the industry’s decline of 3.8%.

First-quarter 2018 core earnings were 24 cents per American Depositary Share (ADS), which missed the Zacks Consensus Estimate of 28 cents. Core earnings per share of 48 cents declined 51% year over year at constant exchange rates (CER) hurt by lower revenues and operating profit. Meanwhile, lower other income due to the unfavorable timing of divestments also hurt earnings in the quarter.

Total revenues declined 9% at CER to $5.18 billion in the reported quarter due to lower product sales as well as externalization revenues. Revenues also missed the Zacks Consensus Estimate of $5.34 billion.

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

Product Sales Decline

Product sales declined 2% at CER in the quarter to $4.99 billion. Higher sales of newer medicines and strong performance in China were offset by rapid erosion in sales of Crestor and lower sales of many other legacy medicines. Externalization revenues were $193 million in the quarter, down 67%.

Externalization revenues are the revenues arising from AstraZeneca’s externalization agreements.

Older Products

Crestor sales declined 42% to $389 million with the United States accounting for $46 million (down 59%) and Europe contributing $65 million (down 70% at CER). U.S. and Europe sales were weak as multiple generic versions of the drug entered the market.

Seroquel XR sales declined 25% to $53 million due to competition from generic launches.

Symbicort sales declined 12% in the quarter to $634 million due to sales decline in the U.S. market. Symbicort sales in the United States declined 28% in the quarter due to pricing pressure and the unfavorable timing of government buying. Sales rose in Europe and Emerging markets.

Nexium recorded sales of $448 million, down 7% due to declining sales in the United States and Europe.

Other key legacy products that recorded sales decline in the quarter include Zoladex (down 6% to $184 million), Arimidex (down 2% to $54 million), Casodex (down 13% to $52 million), Pulmicort (down 3% to $346 million), Daliresp/Daxas (down 16% to $38 million), Synagis (down 2% to $224 million) and Atacand (down 9% to $71 million).

Very few older drugs grew in the quarter including Faslodex (up 14% to $254 million) and Seloken/Toprol-XL (up 3% to $200 million).

Newer Products

Among the newer medicines, Lynparza sales rose 100% to $119 million in the quarter. Sales in the United States surged 144%, gaining from recent label expansion approvals. In Europe, sales rose 44%, pushed higher by a number of successful launches, high BRCA-testing rates and encouraging levels of reimbursement. In the first quarter, Lynparza gained approval in Japan for ovarian cancer and in the United States in breast cancer, which should drive sales further in 2018. Please note that AstraZeneca has a partnership agreement with Merck (MRK - Free Report) for Lynparza.

Brilinta/Brilique sales were $293 million in the reported quarter, up 24% year over year. Brilinta maintained its leadership position in the U.S. branded oral anti-platelet market as well as in a number of European markets. 

Farxiga recorded sales of $298 million in the quarter, up 39% as the medicine continued to lead the market by volume.

New respiratory product Fasenra got off to a strong start, recording sales of $21 million in the quarter, supported by strong launch and uptake in United States and Germany. Fasenra was approved in the United States in November last year and in the EU and Japan in January this year.

In the quarter, Onglyza sales declined 19% to $129 million, reflecting pressure on DPP-4 class and increased competitive pressure from classes of diabetes medicines whose label includes CV benefits.

Tagrisso recorded sales of $338 million, up 89% year over year driven by increased testing rates in the United States and Japan. Last month, AstraZeneca secured an FDA approval for Tagrisso in the first-line setting for advanced lung cancer, which can drive sales higher in the future quarters.

Among other new medicines, Movantik/Moventig recorded sales of $28 million in the quarter, less than $30 million in the previous quarter while Iressa sales declined 1% to $132 million.

Bevespi, a LAMA/LABA in a pressurized metered dose inhaler launched commercially in the United States in January 2017, recorded sales of $5 million in the quarter, less than $8 million in the previous quarter amid slower-than-anticipated growth in LAMA/LABA class.

PD-L1 inhibitor Imfinzi generated sales of $62 million in the first quarter of 2018 compared with $18 million in the fourth quarter of 2017. In February, Imfinzi was approved and immediately launched for the second indication in the United States — early stage lung cancer (NSCLC) — which drove sales in the first quarter. Imfinzi was launched in the United States for the first indication – second line advanced bladder cancer - in May 2017.

Calquence, which was launched in the United States in October last year, generated sales of $8 million in the first quarter compared with $3 million in the previous quarter.

Regional Performance

In the United States, product sales were flat at $1.49 billion as higher sales of newer products was offset by lower Symbicort sales, unfavorable managed-care pricing and generic launches. European markets witnessed a 12% decline in sales to $1.12 billion due to weak Crestor sales. Revenues from Emerging Markets were up 8% to $1.77 billion, primarily on the back of strong growth in China (up 22% to $1.03 billion) while sales declined 7% in ex-China markets due to challenging conditions in the healthcare market in Russia. In Established ROW market (comprising Japan, Canada and other markets), sales declined 10% to $612 million.

Profit Discussion

AstraZeneca’s core gross margin declined 40 basis points (bps) to 78.8%. Core selling, general and administrative (SG&A) expenses rose 6% to $2.03 billion due to investment in new product launches.

In the quarter, core research and development (R&D) expenses declined 12% to $1.24 billion driven by efficiency savings. Operating margins declined 130 bps to 17.3% in the quarter.

2018 Outlook

AstraZeneca maintained its previously issued earnings and sales outlook.

AstraZeneca expects core EPS for 2018 in the range of $1.65 to $1.75 per ADR. The company expects product sales to grow in low single digit percentage. However, product sales growth is expected to be weighted toward the second half of the year.

AstraZeneca is hopeful that the effects of the Crestor patent expiration in Europe and Japan will recede materially in the second half

Management guided that total externalization revenues and other income in 2018 will be less than 2017.

Currency movements are expected to favorably impact product sales and core earnings per share by a low single-digit percentage.

While adjusted R&D costs are expected to be in line or decline in a low single-digit percentage range from 2017 levels, the company anticipates SG&A costs to increase by a low to mid-single digit percentage to support product launches like Fasenra and Imfinzi.

Adjusted tax rate is expected to be in the range of 16%-20% compared with 14% for 2017.

AstraZeneca currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Some better-ranked pharma/biotech stocks include Ligand Pharmaceuticals Incorporated (LGND - Free Report) and Eli Lilly (LLY - Free Report) . While Ligand has a Zacks Rank #1, Lilly is a#2 Ranked stock.

Ligand’s earnings estimates for 2018 and 2019 rose 7.4% and 8% over the past 30 days. The stock has gained 39.6% this year so far.

Lilly’s earnings estimates for 2018 and 2019 increased 4.5% and 2.8%, respectively over the past 30 days.

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