AZN Misses, Guidance Disappoints - Analyst Blog

Yesterday, AstraZeneca’s (AZN) fourth quarter earnings came in at $1.42 per American Depositary Shares (ADS), well below the Zacks Consensus Estimate of $1.57. However, earnings increased 13.6% compared to the year-ago period. Revenues increased 4% at constant exchange rates (CER) to $8.9 billion compared to the same period last year. 

The primary reasons for the increase in revenues were strong US sales of Toprol-XL benefiting from the withdrawal of a generic, US sales of H1N1 vaccine and robust growth in emerging markets. For the full year, AstraZeneca reported revenues and EPS of $32.8 billion (7% growth at CER) and $6.32, (23% growth at CER), respectively. AstraZeneca recorded strong sales across all geographies during the quarter. Sales in North America, Emerging Markets and Established Markets increased (at CER) by 4%, 10% and 2%, respectively. 

Among the product categories, while gastrointestinal and oncology both recorded sales declines of 8% each, all other segments increased their revenues. AstraZeneca recorded about 25% of revenues during the quarter from cardiovascular drug sales. This segment and Infection and Others recorded the highest growth of 17%. Revenues for the Respiratory and Inflammation segment and the Neuroscience segment increased 7% and 5%, respectively. 

AstraZeneca’s core gross margin improved to 81.9% from 77.6% in the year-ago period due to a reduction in cost of sales. Operating profit increased 13% to $3 billion due to a higher gross margin, partially offset by higher operating expenses. 

With respect to the restructuring program announced earlier, over a period of two years since 2007, $2.5 billion in restructuring costs have been incurred. About 12,600 positions have been reduced leading to annualized benefits of $1.6 billion till 2009. The company expects the benefit to reach $2.4 billion by the end of 2010. 

AstraZeneca outlined its next phase of restructuring, which includes completion of the earlier programs, changes in supply chain and certain changes within the R&D segment. The company plans to reduce the targeted disease areas, increase focus on externalization and consolidation activities in this segment. These measures are likely to generate $1.9 billion of annual savings by 2014. However, about 10,400 positions will be affected in the next three years leading to an additional $2 billion in restructuring charges. 

The Board has recommended a 14% increase in the second interim dividend to $1.71, taking the full year dividend to $2.30, an increase of 12%. In addition, a $1 billion share repurchase program was announced. 

AstraZeneca has outlined a tough scenario for 2010. The company expects core earnings per ADS in the range of $5.75 - $6.15. Although the guidance is in line with the Zacks Consensus Estimate of $5.97 per ADS, it is lower than $6.32 reported in 2009. Moreover, due to the potential loss of market exclusivity of Arimidex and Pulmicort Respules in the US, the company expects a mid single-digit decline in revenue based on CER in 2010. Shares were down 5.4% at the end of the day following the disappointing guidance.
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