AstraZeneca Revenues Hurt by Lower Product Sales

Fall in product sales due to entry of Crestor and Nexium generic medicines in US

Pharmaceutical major AstraZeneca PLC (NYSE: AZN) announced its Q4 FY16 and full-year FY16 financial results on February 02nd, 2017.

The Cambridge, UK-based Company engages in the discovery, development, and commercialization of medicines for the treatment of respiratory, inflammation, autoimmune, cardiovascular, metabolic, oncology, infection, neuroscience, and gastrointestinal diseases worldwide. The Company’s pipeline includes 146 projects, of which 125 are in the clinical phase of development. It has collaboration agreements with Celgene Corporation (NASDAQ: CELG), Immunocore Limited, Heptares Ltd., as well as a research agreement with Eli Lilly & Co (NYSE: LLY). Read more about AstraZeneca’s financial results below.

Q4 FY16 financial highlights

During Q4 FY16, AstraZeneca’s total revenues fell 13% to $5.85 billion (fell 12% at constant currency rates or CER) versus the year-ago same period. Of the total revenue during the reporting quarter, product sales accounted for $5.26 billion and externalization revenue accounted for $325 million. The fall in Product Sales primarily reflected the entry of Crestor generic medicines in the US as well as the reducing impact of Nexium generic medicines in the US; Crestor represents the last anticipated blockbuster patent expiry, ahead of significant late-stage pipeline news flow. US sales of Crestor and Nexium fell 57% and 39%, respectively. Overall US product sales fell 37% to $1.61 billion. Product sales in Europe declined 3% to $1.33 billion during Q4 FY16.

During Q4 FY16, AstraZeneca’s reported and core R&D cost grew 2% to $5.89 billion and 5% to $5.63 billion, respectively, including the absorption of the R&D costs of Acerta Pharma and ZS Pharma. On the other hand, reported and core SG&A costs declined by 12% to $9.41 billion and by 9% to $8.16 billion, respectively. Reported operating profit during the reporting quarter was at $2.53 billion, while core operating profit grew 30% to $2.06 billion.

As a result, net profit grew 94% at CER to $1.84 billion, or $1.46 per share, from $808 million, or $0.63 per share, in Q4 FY15. Core net profit grew 9% at CER and 28% actual rate to $1.53 billion, or $1.21 per share, from $1.19 billion, or $0.94 per share, in the year ago comparable period.

In recent months, the loss of market exclusivity on some key products and flagging revenue from aging mainstay drugs such as Crestor has had a negative impact on AstraZeneca’s revenues. Hence, the Company initiated a series of cost-cutting measures to bring down annual costs by $1.1 billion by the end of 2017. At the same time, CEO Pascal Soriot has set a goal of $45 billion in annual revenues by 2023. AstraZeneca has also been narrowing down its therapeutic focus, shedding non-core assets in externalization deals.

FY16 financial highlights

During FY16, AstraZeneca’s total reported revenues fell 7% to $23 billion (fell 5% at constant currency rates or CER) versus the year-ago corresponding period. Of the total revenue during the reporting quarter, product sales accounted for $21.31 billion and externalization revenue accounted for $1.68 billion.

Reported gross profit declined 5% to $18.87 billion, reflecting the market entry of Crestor generic medicines in the US. Excluding the impact of externalization revenue, reported gross profit margin was broadly stable at 80.8%, with lower restructuring and amortization charges offset by an adverse impact from the mix of sales and a write-down of FluMist inventory in the US. Reported R&D costs grew 2% in the year to $5.89 billion, and reflected the number of potential new medicines in pivotal trials as well as the absorption of the R&D costs of ZS Pharma and Acerta Pharma. These costs were partially offset by lower restructuring costs and impairment charges.

Reported SG&A costs declined by 12% in the year to $9.41 billion, driven by efficiency savings in sales and marketing operations and further reductions in IT costs. These actions included a material reduction in the sales and head-office structure in the US marketing business. As a result, reported operating profit grew 9% in the year to $4.90 billion. Reported operating margin increased by three percentage points to 21% of total revenue. As a result, net profit grew 9% at CER to $3.49 billion, or $2.77 per share, from $2.82 billion, or $2.23 per share, in the year ago same period. Core net profit fell 5% at CER and grew 1% actual rate to $5.45 billion, or $4.31 per share, from $5.39 billion, or $4.26 per share, in the year ago comparable period.

Segmental highlights

Emerging Markets: This segment clocked 6% growth to $5.79 billion during FY16, supported by China, up by 10% to $2.63 billion.

Diabetes: This segment clocked growth of 11%, as Farxiga became the Company’s largest-selling diabetes medicine.

Japan: This segment clocked a sales decline of 3% to $2.18 billion, reflecting the biennial price reduction in the year.

Brilinta: This segment clocked a sales growth of 39% to $839 billion and on track to be a blockbuster medicine.

Respiratory: This segment clocked a sales decline of 3% to $4.75 billion, reflecting US pricing pressure for Symbicort.

New Oncology: This segment clocked strong sales of $664 million; Tagrisso delivered sales of $423 million in its first year.

Other highlights

Cash flow: AstraZeneca generated a net cash inflow from operating activities of $4.14 billion in FY16 versus $3.32 billion in FY15. Net cash outflows from investing activities were $3.96 billion versus $4.23 billion in FY15.

Capital expenditure: Capital expenditure amounted to $1.44 billion in FY16, representing an increase of 3%; the majority of capital expenditure was in maintenance. AstraZeneca is in the process of completing a $500-million headquarters and research center in Cambridge.

Rejig of top brass: In January 2017, Leon Wang was appointed to the newly created SET role of Executive Vice-President, Asia/Pacific, with responsibility for the Company’s activities in China and Hong Kong, Asia Area, Australia and New Zealand. As Executive Vice-President, International West, Mark Mallon retains responsibility for AstraZeneca’s businesses in Russia, Latin America, and the Middle East and Africa in addition to his role as EVP, Global Product and Portfolio Strategy, Global Medical Affairs & Corporate Affairs. Luke Miels, formerly Executive Vice-President, Europe, quit the company in January 2017.

Dividends: The Board has declared a second interim dividend of $1.90 per share, bringing the dividend per share for the full year to $2.80. For holders of the Company’s American Depositary Shares (ADSs), the $1.90 per Ordinary Share equates to $0.95 per ADS. Two ADSs equal one Ordinary Share.

Productivity: AstraZeneca’s evolution and the changing shape of the business have enabled productivity improvements through the implementation of restructuring initiatives. These included those announced on April 29th, 2016. Restructuring charges of $1.10 billion were incurred in FY16. The Company remains on track to realize benefits and incur costs in line with prior announcements.

Focus on therapeutic areas: AstraZeneca has been narrowing down its therapeutic focus, shedding non-core assets in externalization deals and building its pipeline in oncology, respiratory disease and cardiovascular/metabolic disease. In August 2016, AstraZeneca agreed to sell its small molecule antibiotics business to Pfizer in a deal that could be valued at more than $1.5 billion. The two established medicines in the deal, Merrem, used to treat serious infections in hospitalized patients, and Zinforo, an intravenous antibiotic used for skin and soft tissue infections and pneumonia, generated sales of $250 million in 2015, according to AstraZeneca.

On December 5th, 2016, AstraZeneca entered into an agreement with Cilag GmbH International, an affiliate of Johnson & Johnson (NYSE: JNJ), for the divestment of the rights to Rhinocort Aqua outside the US. Rhinocort Aqua is a nasal spray indicated for allergic and non-allergic rhinitis (inflammation of the inside of the nose), and for the treatment of nasal polyps (swelling of the nasal lining). Under the terms of the agreement, AstraZeneca received a payment of $330 million from Cilag GmbH International for the rights to the medicine outside the US.

Cost-cutting measures: As part of its efforts to trim costs, AstraZeneca announced on December 04th, 2016, that it will move some back office jobs, including consulting roles from its 280-person finance division from Alderley Park, Cheshire in the UK to either its new headquarters and science center in Cambridge or to newly created regional centers (Costa Rica, Kuala Lumpur, and Warsaw) over the next two years.

Collaboration with Bicycle: AstraZeneca announced on December 1st, 2016, that it has signed a collaborative deal with UK-based private biotech firm Bicycle Therapeutics Ltd to develop a novel class of small molecule medicines to treat respiratory, cardiovascular and metabolic diseases. The alliance could potentially be worth more than $1 billion to Bicycle, if all planned programs reach the market.

Bicycle, which raised $32 million from investors in an initial funding round in 2014, was set up to capitalize on research initiated at the MRC Laboratory of Molecular Biology in Cambridge, UK, by founders Sir Gregory Winter and Professor Christian Heinis. Bicycle is headquartered in Cambridge, UK, with a US subsidiary in Cambridge, Massachusetts.

Guidance for Q1 FY17

For FY17, AstraZeneca continues to expect total revenue to decline in the low-to-mid single-digit percentage range. Core earnings are expected to decline in the low-to-mid teen percentage. Based on the average exchange rates during the year, currency movements are expected to minimally impact the top line in 2017. While adjusted R&D costs are expected to be broadly in line with the 2016 levels, the company anticipates a further reduction in SG&A costs, reflecting the evolving structure of its business.

Stock Performance

AstraZeneca’s stock finished the day at $28.09, gaining 0.61%, at the close on Monday, February 6th, 2016, having vacillated between an intraday high of $28.11 and a low of $27.71 during the session. The stock’s trading volume was at 6,300,348 for the day. The Company’s market cap was at $71.07 billion as of Monday’s close.

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