AstraZeneca Forecasts Lower Profit Amid Generic Pressure

AstraZeneca Plc forecast profit this year will decline “significantly more than revenue” as the U.K.’s second-biggest drugmaker faces increasing competition from lower-priced generic medicines.

Sales will fall by a “mid- to high-single digit percentage” at constant exchange rates in 2013, the London-based company said today in a statement. Analysts had estimated a decline of about 3 percent, according to data compiled by Bloomberg. The company also said earnings fell for a fourth straight quarter and left the annual dividend unchanged. The stock fell the most in nine months.

The profit declines underscore the challenge facing Pascal Soriot, who took over as chief executive officer on Oct. 1. Drugs that account for more than 40 percent of AstraZeneca’s sales lose patent protection by the end of next year, and the company had repeated setbacks in developing new products in recent years. AstraZeneca said it won’t repurchase any shares this year so it will have funds to invest in the business.

“The very conservative outlook indicates that AstraZeneca has not quite turned the corner in terms of patent expiries,” Elmar Kraus, an analyst with DZ Bank AG in Frankfurt, said in an e-mail. “This and the delay in presenting the new strategy will put pressure on the shares.” He recommends buying the stock.

Soriot will give a strategy update at a meeting with analysts and investors on March 21.

Earnings Decline

AstraZeneca fell 3.2 percent to 3,053 pence at the close of trading in London, the biggest drop since April. That gives the company a market value of 38.06 billion pounds ($60.3 billion). Before today, the stock had returned 9.7 percent including reinvested dividends in the past year, trailing the 23 percent return for the Bloomberg Europe Pharmaceutical Index.

AstraZeneca left the annual dividend unchanged at $2.80 a share, the first time in a decade that the company hasn’t raised the payout. In the past, the company increased the dividend and repurchased stock to provide a return for investors while the company waited for experimental drugs to make it to the market and boost earnings. David Brennan, who stepped down as CEO last year after setbacks in drug development, told investors in 2010 not to judge the company by its earnings as it went through patent expirations.

Dividend Target

The board is targeting a dividend that’s about 50 percent of core earnings per share, and aims to maintain or increase the payout while also investing in the business and paying off debt, AstraZeneca said today. Once those requirements are met, the board will review opportunities to return excess cash to shareholders via stock buybacks, the company said.

AstraZeneca suspended its $4.5 billion stock buyback program for 2012 on Soriot’s first day on the job to allow for more flexibility as the company looks for licensing and acquisition deals to replenish its pipeline. On Jan. 15, he announced the head of research and development and the most senior executive for worldwide sales and marketing activities would be leaving the company after he eliminated their jobs.

“What they need to do is buy themselves time and make a big acquisition,” Fabian Wenner, an analyst with Kepler Capital Markets SA in Zurich, said in an interview. He has a hold rating on the shares. “Once they make an acquisition, the shares will rally.”

Acquisition Strategy

The company is looking for products and small companies to buy, and a large, “disruptive” acquisition isn’t likely, Soriot said today in an interview. AstraZeneca would consider purchases in the range of $3 billion to $4 billion and product deals valued at about $500 million to $600 million, he said.

“I don’t think we need a large-scale acquisition to succeed,” he told journalists on a conference call today.

Last year the company announced it would cut 7,300 jobs worldwide, including 2,200 in R&D, in a bid to save $1.6 billion a year by the end of 2014. The restructuring will cost the company $2.1 billion.

Profit excluding some items fell 8 percent to $1.94 billion, or $1.56 a share, in the quarter, compared with $2.1 billion, or $1.61, a year earlier, the company said. Earnings beat the average analyst estimate of $1.33 a share compiled by Bloomberg.

AstraZeneca’s second-best-selling drug, Seroquel for schizophrenia, lost U.S. patent protection in March, while the patent on Nexium for ulcers, the third-biggest seller, expires in the U.S. in 2014. The two generated $10.3 billion in sales in 2011.

Challenging Market

Sales for the quarter slid 16 percent to $7.28 billion, beating the $7.16 billion estimate of 20 analysts.

“Challenging market conditions will persist, including continued government interventions in price,” AstraZeneca said.

Sales of Seroquel IR plunged 92 percent at constant exchange rates in the quarter to $94 million. Nexium, which already faces generic competition in Europe and Canada, fell 1 percent to $1.05 billion.

Sales of the cholesterol drug Crestor, which has faced increased competition from a copy of Pfizer Inc.’s Lipitor, were down 7 percent at constant exchange rates from a year ago at $1.62 billion. Crestor, the company’s top-selling product, loses U.S. patent protection in 2016.

Revenue from the blood-thinner Brilique, sold as Brilinta in the U.S., rose to $38 million during the quarter after the drugmaker made gains in Germany and the U.S. Analysts had expected $40.9 million.

AstraZeneca has ended nine drug development programs since June 30, including a study of selumetinib in combination with a compound called MK-2206 from Merck & Co. Inc. in some solid tumors, AZD4017 for glaucoma and AZD9773 for severe sepsis. Selumetinib, which is being tested in other indications, could enter late-stage trials in non-small cell lung cancer this year, according to slides Soriot presented to investors. In December, the company said fostamatinib, its experimental drug for rheumatoid arthritis, failed to show a benefit against AbbVie Inc.’s Humira in a mid-stage trial.

(Clarifies status of selumetinib in last paragraph of story published Jan. 31.)
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