AstraZeneca (NYSE:AZN) expects a decline in revenue year-over-year (YOY), primarily due to losing exclusivity in Seroquel IR in conjunction with increasing generic competition across its portfolio, restructuring costs, supply chain issues alongside negative macroeconomic and currency impacts in multiple markets. Below, I will explain why current shareholders should hold onto AstraZeneca long-term for its high dividend yield and for its focus and progress towards achieving long-term organic growth. AstraZeneca's second quarter earnings report reaffirmed its 2012 guidance. Investors interested in AstraZeneca should view this quarter has an opportune entry point to invest in a proven commodity in one of the best performing sectors of the market in 2012. AstraZeneca recently announced a new partnership with Pfizer (NYSE:PFE), and is currently strengthening its diabetes alliance with Bristol-Myers Squibb (NYSE:BMY). AstraZeneca also has an abundant pipeline to drive revenue growth.
AstraZeneca is most comparable to the smaller U.S large-cap pharmaceuticals with under $60 billion in market cap like Eli Lilly (NYSE:LLY) and Bristol-Myers Squibb. Aside from the smaller large-cap pharmaceuticals in the U.S., major international large-cap pharmaceuticals like GlaxoSmithKline (NYSE:GSK), Sanofi (NYSE:SNY) and Novartis (NYSE:NVS) all face the same type of headwinds as AstraZeneca, especially throughout Europe. AstraZeneca has the lowest price-to-book and price-to-sales ratios of all of the aforementioned pharmaceuticals. At around 6.02%, AstraZeneca has the highest dividend yield of all these pharmaceuticals, but it has the largest sales deficit for the past quarter compared to the same quarter in 2011.
AstraZeneca's sales growth for the past five years is higher than both Sanofi and GlaxoSmithKline. AstraZeneca's current ratio is higher than both GlaxoSmithKline and Novartis. AstraZeneca's quick ratio is also higher than Sanofi as well. Lilly, Bristol, Sanofi and Novartis all have a slightly lower debt-to-equity ratio than AstraZeneca. However, AstraZeneca has the highest return on equity, operating margin and net margin of all of the aforementioned pharmaceuticals by at least 200 basis points (BPS). At 0.65, AstraZeneca has the third highest beta and is the third best performing stock among these pharmaceuticals year-to-date (YTD) through mid-August. AstraZeneca shares have increased by around 4.1% since its second quarter earnings release.
According to the company's second quarter earnings report, AstraZeneca revenue in the second quarter decreased 18% at CER (constant exchange rate) YOY to $6.66 billion and decreased 15% at CER YOY to $14 billion during the first half of 2012. U.S revenue decreased 29% YOY to $2.34 billion in the second quarter and decreased 20% YOY to $5.26 billion in the first half of 2012. In the first half of 2012, Gross profit decreased 15% at CER YOY while gross margin decreased 190 bps at CER YOY to 81%. In the first half of 2012, operating profit decreased 23% at CER YOY to $5.27 billion while operating margin decreased 380 bps at CER YOY to 42%. Net profit decreased 20% at CER YOY to $4.29 billion. The decrease in revenue was primarily due to U.S. Seroquel IR sales decreasing 59% YOY in the first half of 2012 and 86% YOY in the second quarter.
As a result, U.S. Total Neuroscience revenue decreased 49% YOY and worldwide Total Neuroscience revenue decreased 33% YOY in the second quarter. Total revenue in West Europe decreased 20% at CER YOY to $3.4 billion in the first half of 2012 and decreased 26% at CER YOY to $1.62 billion in the second quarter. Revenue in the Established ROW (rest of world) market decreased 11% at CER YOY to $2.52 billion in the first half of 2012 and decreased 12% at CER YOY to $1.23 billion in the second quarter. Revenue in the Emerging ROW market increased 1% at CER YOY to $2.83 billion in the first half of 2012 and increased 1% at CER YOY to $1.41 billion in the second quarter. Revenue increased by 1% in Emerging ROW but it would've been by 8% had it not been for supply chain issues, AstraZeneca expects improved growth rates for Emerging ROW in the second half of 2012.
Within Established ROW, revenue in Canada decreased by 30% due to the loss of exclusivity for Atacand and an increase of generic competition for Crestor in this market since April 2012. Aside from losing exclusivity for Seroquel IR, revenue in Western Europe decreased from generic competition for Nexium, Atacand and Merrem as well; this was the source of more than 50% of the decreased revenue in the second quarter. AstraZeneca intends to offset patent expirations with a robust pipeline. There are seven products being launched or already approved, while there are 83 in clinical trials. Nine are currently in late development stages, phase III, or undergoing regulatory review. During the first half of 2012, 22 products progressed onto the next stage of development; among those, seven are in human testing. A total of 10 products have been withdrawn.
AstraZeneca and Bristol-Myers formed an alliance in 2007 to collaborate on developing and marketing products for diabetes treatments. Both firms share the costs and the profits while individually and jointly creating new drugs for FDA approval. So far promising products such as Onglyza, Kombiglyze and Forxiga have hit the market as products of the collaboration. Bristol recently acquired Amylin, a pharma focused on diabetes treatments; this will add Byetta and Bydueron to AstraZeneca and Bristol-Myers' collaborative portfolio. AstraZeneca is contributing $3.4 billion to the total $7 billion for the acquisition in addition to $135 million for full corporate governance rights.
AstraZeneca recently announced a new partnership with Pfizer to bring 20 mg Nexium to the consumer market as an OTC product upon FDA approval of an NDA in 2013. AstraZeneca will receive a $250 million upfront payment from Pfizer as well as royalties. AstraZeneca will maintain exclusive rights for the prescription product and will supply Pfizer with the OTC product that is expected to hit shelves in 2014. AstraZeneca has also made an investment in Regulus Therapeutics for the development and commercialization of microRNA therapeutics for cardiovascular, metabolic diseases and oncology treatments as well.
AstraZeneca will recover from patent expirations in 2012 with its growing portfolio and improved diabetes alliance utilizing Amylin's resources and the large number of products in its pipeline approaching regulatory approval in the near term and throughout the next four years. The potential partnership alongside Pfizer for Nexium OTC also has potential to create a substantial source of additional revenue as well. Stable financials, a high dividend and a restructuring plan that will create an additional $1.4 billion in annual savings starting in 2014 all bode well for AstraZeneca looking forward.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.