AstraZeneca confident of return to growth despite mixed Q1

AstraZeneca has a tough first quarter as sales and earnings came in lower than expected due to investment in drug launches and a larger erosion of its Crestor statin drug than expected, but there were encouraging performance from newer drugs.

Revenues of $5.18bn in the three months to 31 March were down 4% at reported rates but without a currency tailwind were down 9%, while core earnings per share of $0.48 slumped 29% at constant exchange rates due to a fall in margins and higher selling, general and administrative costs.

Although revenues were short of the expected $5.2bn or higher and EPS shy of the forecast $0.57, product sales are weighted to the second half of the year and chief executive Pascal maintained his guidance for full year results. Moreover, product sales are still seen coming with a low-single-digit increase with core EPS of $3.30-3.50, updated forex guidance pointed to a low single-digit tailwind on both lines, versus previously guidance for a “minimal impact” on core EPS.

First-quarter product sales of $4.99bn were down by 2% at CER as strong sales in China and from newer medicines across all therapy areas was offset by the decline of Crestor sales in Europe and Japan. Astra's 'externalisation' revenues, where licensing rights to non-core drugs are sold to other companies, were 67% lower in the period at $193m.

Soriot said he expected the effects of the Crestor patent expiries in Europe and Japan to "recede materially" in the second half and hailed the "encouraging launches and strong performances from our newer generation of medicines" paved the way for the anticipated return to growth this year.

The new oncology portfolio saw Tagrisso up 4% on the preceding quarter, Lynparza up 7% and Imfinzi up 38%, all ahead of consensus expectations, with oncology now representing around a quarter of total product sales. In cardiovascular, renal and metabolism, Brilinta and Farxiga performed well and in respiratory there was a successful launch of Fasenra.

"AstraZeneca's pipeline continued to bring significant benefits for patients, most recently with the expanded US approval of Tagrisso for lung cancer and Lynparza for breast cancer," Soriot said. "With our transformation coming into sharper commercial focus as the year progresses, we are confident of delivering on our goals."

While operating costs were cut 1% at the core level and research and development costs fell 12%, driven by efficiency savings, core SG&A costs rose 6% as investment was made in China and new medicine launches. As a result of a legal settlement there was a near doubling in operating income & expense to $469m, but a 64% decline at the core level.

Gross margin tightened five percentage points to 77.3% due to strong comparative quarter last year, with core margin down four percentage points to 78.8%.

REACTION AND ANALYSIS

AZN shares fell more than 2% to 5,211p in early trading on Friday, having risen almost 12% since the start of March.

Despite the modest topline miss, analyst Tara Raveendran at Shore Capital saw the new oncology portfolio as encouraging, with Lynparza now a leading performer by total US prescription volumes and the majority of Imfinzi’s sales in the Stage III non-small lung cancer, following approval after the strong Phase III trial results.

She said the core EPS miss appeared to be driven by higher core SG&A costs and with Q1 2017 being a tough comparator given Astra delivered its lowest level of core S,G&A investment for a number of years. Consensus estimates for core S,G&A are currently at $1.9bn, meaning Astra’s reported core figure was circa 6% ahead of expectations.

"Astra trades on a (justified) premium multiple to its peers, reflecting its superior growth outlook. We are increasingly positive on the return to growth story at Astra, underpinned by new product launches. And would look to build a position on any weakness."

Ian Hilliker at Jefferies saw as a highlight that both newly launched Tagrisso and Lynparza both beat expectations by 4% and 7%, respectively, while in respiratory Pulmicort and Symbicort missed by 9% and 1%, the latter reflecting continued pricing pressure and timing of government buying.

"This quarter's relatively low Core EPS number reflected a low externalisation and OOI [other operating income] contribution which is volatile on a quarterly basis."

As regards full year guidance, he noted that the mid-point of sales target of $20.76bn is circa 1% below consensus, likewise for core EPS the $3.40 mid-point is around 1% below the $3.44 analyst average.