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AstraZeneca’s (AZN) first-quarter 2013 core earnings of $1.41 per American Depositary Share (ADS) beat the Zacks Consensus Estimate of $1.34. Earnings were down 21% (at constant exchange rates [CER]) year over year.

AstraZeneca’s quarterly revenues fell 12% (at CER) year over year to $6.4 billion, primarily due to intense generic competition. Revenues were below the Zacks Consensus Estimate of $6.5 billion.

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

The Quarter in Detail

US revenues were down 16% in the first quarter of 2013 to $2.4 billion, primarily due to generic competition for Seroquel IR. US healthcare reform negatively impacted first-quarter revenues and costs by $223 million.

Excluding Seroquel IR, revenue increased by 3%, attributable to inclusion of revenues from the company’s share of the Amylin diabetes portfolio.

Revenues declined 9% in the Rest of the World (RoW) to $4.0 billion. The decline was attributed to weakness in the European markets, which was down 16% primarily due to loss of exclusivity on Seroquel IR, Atacand and Nexium.

Established ROW was down 17%. Results were hurt by a 90% decline in Crestor sales in Canada as a result of generic competition and pricing pressure in Australia. Revenues in Emerging Markets witnessed 9% growth in the reported quarter fuelled by growth in China (21%).

The drugs facing generic competition include Seroquel IR (down 82% to $127 million), Nexium (down 1% to $940 million), Arimidex (down 33% to $92 million), Casodex (down 13% to $92 million), Atacand (down 47% to $168 million) and Merrem (down 31% to $68 million).

However, drugs such as Iressa (up 20% to $168 million), Onglyza (up 27% to $90 million), Symbicort (up 14% to $826 million) and Faslodex (up 5% to $157 million) performed well during the quarter.

Brilinta sales were $51 million in the first quarter of 2013 compared with $38 million in the fourth quarter of 2012.

Other Details

AstraZeneca’s core gross margin increased 0.9 percentage points to 82.2% in the first quarter of 2013. Core selling, general and administrative (SG&A) expenses went down 2% to $2.1 billion primarily due to lower selling and marketing costs (mainly in the developed markets).

During the quarter, core research and development (R&D) expenses amounted to $963 million, reflecting a decrease of 7%, attributable to lower investment in phase III trials and savings from restructuring programs. Operating profit as a percentage of sales stood at 36.4%, down 4.4 percentage points.

2013 Outlook

2013 will be a challenging year for AstraZeneca. The company continues to expect 2013 revenue to decline in the mid-to-high, single digit and core earnings to decline considerably more than revenue.

Generic competition has adversely impacted AstraZeneca’s revenues over the past few quarters. This has put significant pressure on the company. AstraZeneca is looking towards cost-cutting initiatives to drive the bottom line in the face of genericization.

We note that last month AstraZeneca initiated a major overhaul of its R&D and selling, general and administrative (SG&A) segments. As per the proposed plans, the company’s R&D activities will be primarily centered in three facilities including UK (Cambridge), US (Gaithersburg) and Sweden (Mölndal).

The proposed initiative will result in relocation and termination of approximately 2,500 and 1,600 roles, respectively, in the 2013-2016 timeframe and cost approximately $1.4 billion. The SG&A segment will also be optimized with the help of restructuring activities, which will result in the termination of approximately 2,300 employees.

Additionally the company is also working on expanding the pipeline. We believe its agreements with Karolinska Institutet, Moderna Therapeutics, BIND Therapeutics and the acquisition of Alphacore Pharma are efforts in that direction.

AstraZeneca, a biopharmaceutical company, carries a Zacks Rank #3 (Hold). Biopharma stocks like UCB (UCBJF), XOMA Corporation (XOMA) and Athersys Inc. (ATHX) appear to be more attractive. All three stocks carry a Zacks Rank #1 (Strong Buy).

 
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