AstraZeneca sales shrink but future hangs on drug pipeline

AstraZeneca reported a second interim dividend after posting flat core earnings for 2016 after a 13% decline in revenues in the fourth quarter, but the company and investors are holding their breath in hope that 2017 will be "a defining year" for a dozen potential blockbuster drugs to breathe life back into its withered portfolio.

The decline in revenue towards the end of the year led to annual turnover falling 7% to £23bn, reflecting the rise of generic rivals to its Crestor high-cholesterol treatment, its last great blockbuster patent. This was almost bang in line with the consensus forecast.

Although core operating profits rose 30% in the final quarter, they were still down 3% for the year, with core earnings per share up 1% at $4.31, down 5% at constant exchange rates. However, these numbers were around 1.5% and 1.7% ahead of the consensus estimate respectively.

There was good progress on keeping costs under control as, despite it massive efforts to unearth big new drugs, core R&D costs rose 5% to $5.6bn and core business overheads shrank 9% to $8.2bn and by 12% at the reported level.

The second interim dividend of $1.90 per share brings the total dividend for the full year to $2.80 per share, with the board reaffirming its commitment to the progressive dividend policy.

Chief executive Pascal Soriot said the results in the year were in line with expectations and reflected the ongoing transition of the business from its flagging legacy products, through the current R&D push to boost its drug pipeline, describing 2017 as "an exciting time as we rapidly approach the inflection point for our anticipated return to long-term growth".

With 12 drugs in the final stage of development, the Frenchman highlighted Priority Review Designations from the US regulator for cancer drugs durvalumab and Tagrisso, as well as regulatory submission acceptances for durvalumab in bladder cancer and for benralizumab in severe, uncontrolled asthma.

"Our underlying business is growing as a new AstraZeneca emerges, driven by competitive franchises and Emerging Markets.

"2017 has the potential to be a turning point for our company as we near the end of our patent-expiry period and bring new medicines to patients across the globe."

His guidance for 2017 was for a “low-to-mid single digit percentage decline” in total revenues and a “low- to-mid teens percentage decline” in core EPS, with an adverse foreign exchange impact of “low single digits”.

This compares with the company-compiled consensus forecasts for -6.2% and -14.5% decline in 2017 revenues and core EPS respectively.

AstraZeneca's shares fell more than 1% to 4,201p in the hour following the announcement on Thursday morning.

Analyst Nicholas Hyett at Hargreaves Lansdown said full year results are pretty unimportant to AstraZeneca’s investors, as the revenue declines were hardly good news, but are neither unexpected nor central to the AstraZeneca investment story at the moment.

"All eyes are fixed on the portfolio, which, with 12 drugs in the final stage of development, has the potential to add substantially to future revenues and earnings.

He said most important among these is the MYSTIC lung cancer trial for durvalumab and tremelimumab, which is expected to report in the middle of this year.

"Until the final data readouts are announced, both Astra’s shares and its investors are likely to remain in limbo.”

Analyst Tara Reevandran at Shore Capital said: "We see continued pressure on Astra’s near-term earnings – with pricing headwinds and competitive pressures on Brilinta, Diabetes and respiratory and an increasing reliance on the monetisation of noncore assets (“externalisation”) to support near-term R&D.

"Hence near-term performance is heavily reliant on delivery of the pipeline, particularly the immuno-oncology assets."

She acknowledged there was "very little" of the potential for the IO pipeline incorporated in the market's price at present, but she continued to view the upcoming MYSTIC readout "as a high-risk event".