AstraZeneca's Q1 Operating Income Up on Currency Movements and Improved Efficiency

Anglo-Swedish pharmaceutical giant AstraZeneca benefited from its restructuring efforts and a 6% positive impact from currency movements in the first quarter of the year. The group's operating income, as calculated by Global Insight, was up 5% year-on-year (y/y) on an as-reported basis to US$2.1 billion. Global net sales were up 10% y/y—or 4% at constant exchange rate (CER)—to US$7.7 billion. Sales growth was strongest in emerging markets, with y/y growth here at CER coming in at 11% y/y to US$981 million. Sales in the United States grew by 5% y/y to US$3.4 billion, adversely affected by product de-stocking. Western European sales grew by 9% y/y on an as-reported basis to US$2.4 billion, but fell by 1% y/y at CER.

During the first quarter of the year, the group's net income fell by 4% y/y to US$1.5 billion and its operating margin, as calculated by Global Insight, fell by 1.3 percentage point y/y to 27.8%. Operating expenses benefited from the company's restructuring programme implemented at the beginning of 2007 (see AstraZeneca: 2 February 2007: AstraZeneca Braces for Leaner Times with 3,000 Redundancies as Operating Profit Jumps 22%). Indeed, improved efficiency kept research and development (R&D), cost of sales, and distribution expenses at bay, with growth of 6%, 1%, and 8% y/y, respectively. The company booked US$32 million in restructuring and synergy costs in the cost of sales category and US$54 million in the R&D category. Despite efficiency savings, selling, general, and administrative (SG&A) costs were up an impressive 23% y/y to US$2.7 billion. The rise occurred as the company booked US$104 million in Merck and MedImmune-associated amortisations, US$31 million in restructuring costs, and US$257 million in impairment of intangible assets resulting from an "at risk" launch of a generic competitor to oncology drug Ethyol (amifostine injection) in this category.

Although they lost some sales momentum, AstraZeneca's gastrointestinal and cardiovascular franchises were the top earners in the first quarter of the year, with collective sales of US$1.5 and US$1.6 billion, respectively. Sales of ulcer treatment Nexium (esomeprazole) were down 9% y/y at CER to US$1.2 billion. Nexium's sales suffered from price pressures in the United States and global competition from generic omeprazole. Heartburn drug Losec/Prilosec (omeprazole) and antihypertensive Toprol-XL (metoprolol succinate) suffered at the hands of fierce generic competition as sales fell by 16% y/y at CER to US$252 million and by 60% y/y at CER to US$190 million, respectively. U.S. Toprol prescriptions are now dispensed generically in 87% of cases.

The respiratory, oncology, and neuroscience franchises all enjoyed growth in the first quarter of the year. Sales rose 7% y/y at CER in the neuroscience franchise, fuelled by anti-depressant Seroquel (quetiapine fumarate), sales of which rose to US$1 billion, a 10% y/y increase at CER. Anti-cholesterol drug Crestor (rosuvastatin calcium), its sales up 16% y/y at CER to US$772 million, carried on its progression and now holds an 8.75% share by volume of the U.S. statin market. Sales in the respiratory franchise were driven by asthma treatment Symbicort (budesonide, formoterol), which enjoyed 21% y/y growth at CER.

Outlook and Implications

AstraZeneca has reiterated its full-year guidance and has upgraded its predictions for earnings per share (EPS) on the back of positive currency effects. The company has had a positive start to the year. One of the biggest milestones achieved by the Anglo-Swedish giant over the last three months has been the settlement of its intellectual property lawsuit over blockbuster Nexium with Ranbaxy (see United States - United Kingdom - India: 15 April 2008: Settlement Reached on Nexium After AstraZeneca's Patent Infringement Win over Ranbaxy). Although a challenge by Israeli firm Teva is still ongoing, the deal has cooled down the threats of generic competition for Nexium for now and will ensure that AstraZeneca enjoys the drug's returns for the foreseeable future.

AstraZeneca has also made progress on the regulatory filing front. After a dry 2007, the giant has filed monoclonal antibody Numax (motavizumab) in the prevention of respiratory syncytial virus for regulatory approval in the United States (see United States - United Kingdom: 6 February 2008:MedImmune Files for U.S. Approval of Monoclonal Antibody Motavizumab). This is the first of three regulatory filings this year—the company is on track to file anti-diabetic drug candidate saxagliptin by the middle of the year and EGFR inhibitor Zactima (vandetanib) by the year-end. Additional revenues could also be derived upon regulatory submission of Seroquel in the major depressive and generalised anxiety disorder indications and Symbicort in the chronic obstructive pulmonary disease indication and for use in paediatric patients. Additional revenues from Symbicort will be all the more significant now that AstraZeneca has finished paying royalties to U.S. pharma company Merck on the product (see United States - United Kingdom: 29 February 2008:Merck Holds On to AstraZeneca Products).

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