Astra Zeneca takes big hit to profit in third quarter

Legal costs related to Seroquel are largely to blame, but the company faces threats on multiple fronts

Jeffrey Bouley
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LONDON—With a drop to $1.55 billion compared with $2.12 billion a year earlier, AstraZeneca reported a 27 percent drop in profit in the third quarter. Much of that can be blamed on reports that its anti-psychotic drug Seroquel has harmful side effects, a legal claim that forced the company to set aside nearly half a billion dollars—$203 million for agreements in principle that would resolve more than 18,000 current claims, and $270 million as a reserve to cover settlements for future claims that are as yet unresolved.

AstraZeneca remains "firmly on track" to meet full-year financial targets, according to David Brennan, CEO of AstraZeneca, but not all market-watchers share his confidence.  Emmanuel Papadakis at Collins Stewart, for example, rated the company's shares a "sell," saying that the weak performance is in line with consensus expectations and that "sales are showing the first underlying decline for a long period."

Analyst Tom Kemp of Panmure Gordon, however, keeps AstraZeneca as a top pick in the pharmaceutical sector, saying that his firm expects the pharma to continue to beat on earnings and "quite possibly also increase the scope of its long-term guidance as early as January 2011," adding that third quarter revenue was up in all regions except the United States, AstraZeneca's largest market, where revenue fell 13 percent due to generic competition and a lack of pandemic flu sales.

No one in the market should be surprised by the results, says Jeremy Batstone-Carr, an analyst at Charles Stanley & Co., who pointed to the expiration of important patents in coming years, the company's exposure to Seroquel claims and the three-month postponement of a U.S. regulatory action on the coronary disease drug Brilanta, which were all "well known." He saw no reason for his firm to alter an "accumulate" stance and sees share price weakness as an opportunity to "build exposure."

"What is not factored in is the possibility that, boosted by legendary cash generation and in the absence of any significant M&A, the company may choose further to expand its share buy-back program from the already expanded $2 billion and maybe as early as the FY 2010 results stage early next year," Batstone-Carr says.

Even with the legal problems, Seroquel sales were up 7 percent in the third quarter.

Simon King, pharmaceutical company analyst at Datamonitor, isn't ruling AstraZeneca out, but says that there are a great many question marks. He says third quarter revenue is down year-on-year due to generic exposure with Arimidex, Pulmicort Respules and Toprol-XL, which he calls "the key casualties," and he notes that the company's exposure to generic competition "will only worsen over next few years as Symbicort, Seroquel and Nexium franchises have lost patent exclusivity."

King also points out that the company has not followed many of its fellow Big Pharma competitors and peers in diversifying into what he calls "lower margin but more stable segments" and says that AstraZeneca's "pure play" pharma model "is becoming questionable in light of the intensifying generic competition."

"Crestor and Symbicort remain the jewels in the crown—sales up 20 percent and 19 percent, respectively—but the question remains as to how Crestor will perform beyond late 2011 when generic Lipitor becomes available," King notes. "Will Symbicort hold off new respiratory market entrants?"

Because of such factors, AstraZeneca's growth outlook will remain heavily tied to new product launches and the progression of late-stage products through the regulatory arena, and King adds that "Sentiment moving into 2011 will therefore be significantly shaped by the US FDA's decision on Brilinta in December. AstraZeneca cannot suffer any further late stage setbacks."

Jeffrey Bouley

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