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Earlier this week, AstraZeneca (AZN), Britain's second-biggest pharmaceutical company after GlaxoSmithKline (GSK), released results for the three months to end-September with revenues at $6,682m down 15 per cent at constant exchange rates, with the loss of exclusivity on several brands and disposals cited as the key reasons for the revenue decline. Pre-tax profits fell to $2bn from $4.2bn last time.

The third quarter EPS was $1.22, a 50 per cent decline at constant exchange rates, but still better than the consensus expectation of $1.13.

For the nine months to September 30th, actual revenues fell 17 per cent to $20,691m compared to 2011 with pre-tax profit dropping 23 per cent to $7,578m.

New man at the helm

The latest earnings update was the first under the group's new chief executive Pascal Soriot who was previously a senior executive at Swiss drugs group Roche (RHHBY.OB). Soriot commenting on the results, as follows:

"As expected, the company's financial performance in 2012 largely reflects the ongoing impact from the loss of exclusivity for several brands in key markets, as well as the challenges that confront the pharmaceutical industry as a whole".

Sales were negatively impacted by the loss of the patent that protected Seroquel IR, a treatment for schizophrenia. Sales of the treatment crashed from $1 billion to just $169 million during July, August and September.

"On a more positive front there was strong growth for Symbicort, Faslodex, Iressa and Onglyza. Moreover revenues from emerging markets increased by 6% at constant exchange rates, with 23% revenue growth in China and Russia in the third quarter".

Commenting on the job ahead, Soriot said:

"Since joining AstraZeneca, I've been deeply impressed by the commitment, talent and passion of our people and by their determination to deliver against our targets. As I take up my new role as Chief Executive, my priority is to restore the Company to growth and scientific leadership."

AZN is suffering as some of its key blockbusters, such as the antipsychotic Seroquel, have lost their patent protection, paving the way for cheaper generics to enter the market. Losing patent protection for Seroquel sent its US revenues down 19 per cent while revenue in Western Europe slipped 29 per cent.

As a remedy, like other drug makers, AZN is focusing increasingly on sale from emerging markets such as China. Sales in those markets grew by 6 per cent in constant currency terms in the quarter, with 23 per cent growth in China and in Russia. But a weak performance in Mexico hit overall emerging markets growth by more than 2 percentage points, highlighting the volatility of drug demand in some countries.

Problems and outlook

The problems large parts of the pharmaceutical industry are facing are well documented with AstraZeneca's impending 'patent cliff'; one of the worst positioned in the industry.

AZN is facing crucial patent expires up until 2015 on drugs such as schizophrenia treatment Seroquel and heartburn and ulcer drug Nexium. It will also suffer the loss of patent protection in the United States for its best-selling anti-cholesterol drug, Crestor, in 2016.

It is not alone in this with increasing sales losses in Western markets reported by Eli Lilly (LLY), Bristol-Myers Squibb (BMY) and Novartis (NVS) all missing their quarterly sales forecasts.

There is a general decline in the discovery, approval and marketing of new drugs, with fewer blockbusters making it to market. Secondly, many of the blockbuster treatments have had their patents expired already or are facing patent expires with generic competition increasing. There are also increased regulatory pressures on the sector worldwide and there is weak growth in the USA, still the largest pharmaceutical market in the world.

In comparison to some of its competitors such as Merck (MRK), Pfizer (PFE), Roche, Sanofi (SNY) and GSK, AstraZeneca is a pure pharmaceuticals group, without the cushion of alternative revenue streams found at its more diversified rivals, therefore it needs to find new prescription drugs - something it has been struggling with in recent years.

However, there is no doubt that the healthcare sector in general has significant future potential. The global population is aging significantly with the expectation that in the next 10 years the number of people aged over 60 will surpass 1 billion an increase of about 200 million people over the decade. These demographics, coupled with rising incomes in the developing world, surely will provide a supportive background to the healthcare sector.

Actions

Earlier this month AZN's new chief executive, Pascal Soriot suspended its share buyback on his first day at the office. His decision has prompted speculation that medium to large acquisitions may be in the cards in order to revitalise AZN's pipeline.

Year-to-date net share repurchases totaled $2.3bn. The group's initial full-year target for repurchases was $4.5bn. SO, AZN is keeping the $2.2bn it had yet to spend, shaving approximately 2 per cent off earnings per share in the current year. Still management is keeping its guidance for full-year earnings of between $6 and $6.30 a share.

Soriot's predecessor's strategy was to boost returns to shareholders via buy-backs and high dividends while the group's scientists are struggling to discover new medicines to replace those coming off patent. Clearly this has become unsustainable unless the pipeline can be replenished.

In conclusion

Having suspended the group's share buyback programme, AZN has increased its financial flexibility as it undergoes a strategy review that is set to be presented to investors in the first quarter of 2013.

There is also no suggestion that the dividend is at risk, and these remain very much the main attraction of the shares at the moment.

We are looking forward to see clear signals of how Soriot is going to "restore the company to growth and scientific leadership".

Source: With AstraZeneca's Results Down Is Its Dividend Safe?