AstraZeneca (AZN) Misses Q3 Earnings, Tweaks 2017 EPS View

AstraZeneca plc (NYSE:AZN) reported third-quarter 2017 core earnings of 56 cents per American Depositary Share (ADS), which missed the Zacks Consensus Estimate of 57 cents. Core earnings declined 17% year over year at constant exchange rates (CER). Lower product sales and gross margins and higher SG&A costs hurt profits in the quarter.

Total revenue rose 10% at CER to $6.23 billion in the reported quarter. Revenues also beat the Zacks Consensus Estimate of $5.75 billion. Revenues, however, gained mainly from the $997 million payment from Merck (NYSE:MRK) for the oncology collaboration the companies announced in July to jointly commercialize and develop Lynparza/selumetinib.

Meanwhile, product sales declined in the quarter due to generic competition facing some legacy products.

Key growth platforms (representing 66% of total revenues) were up 6% in the quarter at CER. Among the key growth platforms, Emerging Markets, New Cardiovascular & Metabolic Diseases (CVMD), New Oncology and Japan performed well in the quarter. However, Respiratory sales declined 2% in the reported quarter.

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

Product Sales Decline

Product sales declined 2% in the quarter to $4.88 billion due to lower sales in the United States as well as Europe, which offset strong performance in emerging markets and in China.

Crestor sales declined 14% to $580 million with sales in the United States and Europe down due to the entry of multiple generic versions of the drug in the market.

Seroquel XR sales declined 68% to $62 million due to competition from generic launches.

In the quarter, Onglyza sales declined 25% to $127 million due to competitive pressure in the DPP-4 class.

Symbicort sales were down 4% in the quarter to $668 million due to lower sales in the United States and Europe. U.S. sales declined in the due to continued pricing pressure from managed-care access within the ICS/LABA class and also competition from other class like LAMA/LABA combination medicines.

Nexium recorded sales of $469 million, down 7%.

However, some legacy products that recorded growth in the quarter include Farxiga/Forxiga (up 29% to $285 million), Daliresp/Daxas (up 26% to $53 million), Faslodex (up 16% to $241 million), Iressa (up 10% to $137 million), Pulmicort (up 9% to $242 million) and Atacand (up 11% to $80 million).

Among the newer medicines, Lynparza sales rose 36% to $81 million. While sales in the United States gained from the label expansion approval in August for the treatment of second-line ovarian cancer, in Europe, sales were pushed higher by a number of successful launches.

Brilinta/Brilique sales were $284 million in the reported quarter, up 36% year over year and 4.4% sequentially. Brilinta maintained its leadership position in the U.S. branded oral anti-platelet market. In the United States., Europe and China, Brilinta continued to display an impressive performance.

Tagrisso, launched in 2015, recorded sales of $248 million, up 7% sequentially. Another new medicine, Movantik/Moventig recorded sales of $30 million in the quarter, less than $32 million in the previous quarter.

Bevespi, a LAMA/LABA in a pressurized metered dose inhaler launched commercially in the United States in January 2017, recorded sales of $4 million in the quarter, less than $3 million in the second quarter as the LAMA/LABA class grew more slowly than anticipated.

PD-L1 inhibitor Imfinzi, launched for second-line bladder cancer in the United States in May, did not generate any sales in the third quarter against $1 million in the second quarter. A regulatory application seeking label expansion of Imfinzi to treat an earlier stage of lung cancer was granted priority review by the FDA last month.

Imfinzi is a key candidate in the company’s immuno-oncology pipeline,which is beingevaluated for multiple cancers, either alone or in combination with other regimens. Last month, AstraZeneca expanded its clinical trial collaboration with Incyte (NASDAQ:INCY) to evaluate Incyte’s investigational selective IDO1 enzyme inhibitor, epacadostat, in combination with Imfinzi, compared to Imfinzi alone in early lung cancer.

Regional Performance

Product sales declined 10% to $1.39 billion, primarily due to generic competition for Crestor and Seroquel XR and pricing pressure for Symbicort in the United States. European markets witnessed an 8% decline in sales to $1.19 billion. Revenues from Emerging Markets were up 10% to $1.52 billion primarily on the back of strong growth in China (up 14% to $723 million). In Established ROW market, sales were flat at $793 million.

Other Details

AstraZeneca’s core gross margin declined 400 basis points (bps) to 79.6%. Core selling, general and administrative (SG&A) expenses rose 4% to $1.95 billion.

In the quarter, core research and development (R&D) expenses were flat at $1.34 billion.

2017 Outlook

While AstraZeneca retained its previously issued sales outlook for 2017, it slightly refined the core earnings guidance.

AstraZeneca continues to expect total revenue to decline in the low-to-mid single-digit percentage range in 2017. However core earnings in 2017 are expected toward the favorable end of the previously issued guidance of a decline in low-to-mid teen percentage. Based on the average exchange rates in the first half, currency movements are still expected to adversely impact the top line by a low single-digit percentage but minimally impact core EPS.

Our Take

Though AstraZeneca’s third-quarter performance was mixed, shares rose around 1.4% in pre-market trading on Thursday as the company brightened its 2017 earnings outlook. Moreover, the company has announced quite a few positive developments on the regulatory and pipeline front so far this year. The latest such development is the accelerated approval of Calquence for the treatment of mantle cell lymphoma, an aggressive form of blood cancer, last month.

Backed by the positive news flow, so far this year, AstraZeneca’s shares have gained 22%, comparing favorably with the industry’s growth of 14.8%.

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

A better-ranked company in the large-cap pharma industry is Johnson & Johnson (NYSE:JNJ) , carrying a Zacks Rank #2 (Buy).

Shares of J&J are up 22.7% while earnings estimates for 2018 have gone up 1.6% over the past 30 days.

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