On Thursday, AstraZeneca (AZN) posted difficult third-quarter results as the loss of exclusivity on several brands (namely Seroquel IR) and a couple divestitures dove revenue 15% lower. Core earnings per share declined 8%, while reported earnings per share dropped 50%. Still, management reiterated its full-year 2012 financial targets for earnings per share between $6.00 and $6.30 per share, and we don't expect to make a material change to our fair value estimate at this time.
The headline numbers were poor. US revenues dropped 19% in the third quarter, as a result of the loss of exclusivity of Seroquel IR, while revenue in the rest of the world (ROW) fell 12% during the period. The company noted that the loss of exclusivity of four products (Seroquel IR, Atacand, Nexium, and Merrem) accounted for 70% of the ROW revenue decline. The company also faced generic competition for Crestor and Atacand in Canada, which hurt performance.
AstraZeneca's results clearly show that it is not immune to the 'patent cliff' also faced by other pharmaceutical companies. Lilly's (LLY) antipsychotic Zyprexa, Bristol-Myers' anticlotting drug Plavix (BMY), and Pfizer's (PFE) cholesterol drug Lipitor have put pressure on the group's results as of late.
Given these headwinds, it wasn't surprising to see core gross profit fall 15% during the period and core operating profit drop 14%, broadly in line with the pace of the sales decline - suggesting management is doing a good job of scaling its cost structure lower as revenue pressure intensifies. The company's restructuring and productivity initiatives are expected to deliver $1.6 billion in annual benefits by the end of 2014.
AstraZeneca continues to be a solid cash generator. The firm has pulled in roughly $4.1 billion in cash from operating activities during the first nine months of the year, and we expect the company to continue to execute on its shareholder-friendly policies of share buybacks and dividend increases in the coming years. AstraZeneca scores a 2.2 on the Valuentum Dividend Cushion, so we view its payout as solid given its balance sheet and cash-flow trends. Though we like AstraZeneca and its pipeline (click here), we prefer the Health Care ETF SPDR (XLV) in the portfolio of our Best Ideas Newsletter, given greater diversification benefits and broad-based undervaluation of constituents.