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Summary

  • AstraZeneca is attempting to make an earnings comeback after being hindered by a series of patent expirations, which has taken a toll on revenues.
  • Pfizer isn't budging with respect to unveiling whether it still has plans to acquire AstraZeneca after the 3-to-6-month waiting period.
  • Regardless, AstraZeneca is proving that it can exceed expectations independent of Pfizer, pursuant to the latest earnings report. Thus, I reaffirm my bull thesis in light of strong earnings performance.

In early June I wrote a bullish article on AstraZeneca (NYSE:AZN), with a thesis stating that the company's extensive oncology pipeline as well as its attractive buyout prospects in light of Pfizer's (NYSE:PFE) recent attempts to court Astra (which ultimately valued Astra at $120 billion) were compelling reasons to accumulate shares. However, I also factored in the underlying risk to an Astra investment, since, after all, Astra is one of many Big Pharma companies to suffer from imminent patent expirations and lackluster performance (see previous article for more details). For Astra, these issues have continued to exacerbate top line pressure, prompting my concern about the company's long-term prospects. But after the latest earnings report, I think it's clear that the company can thrive without Pfizer. Thus, I reaffirm my bull thesis since I'm confident that Astra will stand to benefit over the long term as its extensive oncology pipeline comes to fruition.

As reported by Seeking Alpha, some key highlights of Astra's latest earnings report are as follows:

  • Earnings per share drops 4% to $0.63, but core EPS increased 8% to $1.30, beating the average analyst estimate of $1.09.
  • Management adjusts revenue guidance in line with 2013, versus prior guidance for a low-to-mid-single-digit decline.
  • Management also adjusts core EPS guidance for a decline in the low double digits, versus prior guidance for a drop in the teens.
  • Sales rise 4% to $6.45 billion, beating analyst expectations.

Why the earnings beat? Fivefold: first, Astra managed to succeed in further delaying the launch of Ranbaxy Laboratories' generic Nexium. Nexium generates around 2% of Astra's total sales each quarter. The generic was originally expected to enter the market back in May, but Astra managed to delay the launch, which is now expected sometime in October. Second, Astra benefited from strong performance in emerging markets, namely from a 23% sales increase in China, as well as a 30% sales increase in the U.S. for Symbicort. Astra stated that the latter was due in part to the exclusion of competing treatments from a recommended prescribing list. Third, Astra began including the full revenue from its $4.3 billion buyout of its diabetes joint-venture with Bristol-Myers Squibb (NYSE:BMY) back in February, which clearly bolstered earnings this quarter. Fourth, Astra received a $200 million milestone payment after the May launch of the over-the-counter version of Nexium, accompanied by an $80 million payment related to the Japanese launch of Forxiga. And fifth, Astra received a $117 million tax benefit during the period.

Going forward, I maintain that Astra's rich oncology pipeline could alleviate top line pressure, and the latest earnings show that the company is certainly capable of growing without Pfizer. Thus, I think investors shouldn't be disappointed if Pfizer terminates its efforts to court the company, following the waiting period. Astra stated yesterday that it has three promising cancer therapies entering late-stage trials. Also, both olaparib, indicated for prostate cancer, relapsed ovarian cancer, solid tumors and neoadjuvant and adjuvant breast cancer, and AZD9291, indicated for non-small cell lung cancer, appear promising. As a result, I believe investors should accumulate in the wake of the latest earnings beat, as well as Astra's outstanding growth prospects as an independent pharmaceutical company.

Source: Update: AstraZeneca's Earnings Beat Reaffirms Bull Thesis