AstraZeneca Boosted by Licensing Deals -- 2nd Update

By Denise Roland 

LONDON-- AstraZeneca PLC on Thursday reported an increase in second-quarter revenue, thanks to proceeds from licensing deals, though profits continued to fall as the company plowed heavy investment into new drugs it hopes will replace its old blockbusters.

The U.K.-based drug maker said revenue increased 2% at constant currency to $6.31 billion in the second quarter, while core operating profit, which strips out certain one-time items, fell 4% at constant currency to $1.81 billion, both beating market expectations. Analysts surveyed by The Wall Street Journal had expected sales of $5.71 billion and core operating profit of $1.73 billion. Net profit slumped 12% to $697 million.

The strong dollar cut into the results, with revenue down 7% and core operating profit slumping 11% in reported terms.

The company also upgraded its revenue outlook, saying full-year sales would decline by a low-single-digit percentage, up from earlier guidance of a mid-single-digit fall. However, it maintained its earnings guidance, reflecting a step-up in research-and-development investment to speed the development of its pipeline. The company said R&D spending increased by 24% year-over-year in the first six months of 2015, but it said this growth rate would slow in the second half.

Shares were up 2.7% to 4,303 pence in midday London trading.

AstraZeneca has started including what it calls "externalization revenue, " or proceeds from partnerships and licensing deals, in its top line as this is becoming an increasingly significant revenue stream for the company.

Stripping out the effect of the strong dollar, product sales fell 1% to $5.84 billion in the second quarter but externalization revenue increased 54% to $471 million. The rise in externalization revenue was largely driven by a $450 million upfront payment from Celgene Corp. for the rights to develop one of Astra's immuno-oncology medicines, MEDI4736, in certain blood cancers. AstraZeneca expects more externalization revenue in the second half of the year, but the pace will slow, Chief Financial Officer Marc Dunoyer said.

Still, product revenue beat analysts' expectations, with sales of old blockbusters Crestor, a cholesterol drug, and Nexium, for indigestion, declining more slowly than anticipated.

AstraZeneca's newer drugs didn't disappoint, either. Sales of heart drug Brilinta, a product that AstraZeneca has highlighted as a source of future growth, increased 38% at constant exchange rates to $144 million.

The heart drug is one of the "growth platforms" key to Chief Executive Pascal Soriot's goal of increasing annual revenue to $45 billion by 2023, nearly double the $26.1 billion made in 2014. The others are diabetes, respiratory, emerging markets and Japan. Astra said that in the first half of 2015, these five areas grew 11% and made up 56% of total revenue.

Mr. Soriot was eager to stress the importance of product sales over externalization revenue, saying that while the latter had "helped" the top line, AstraZeneca's performance in the second quarter was "really driven by our products."

"We are transitioning our portfolio from a very concentrated portfolio, supported by very large products, to a very large portfolio with a large number of growth drivers, but also a growing focus on specialty care, which is a very profitable business," he said. "With these new revenues, we are fully confident about delivering 2017 revenue which will be broadly in line with 2013 in constant exchange rates."

The CEO has also placed strong emphasis on the company's pipeline of cancer drugs for future growth. AstraZeneca is one of a number of companies racing to file drugs in a new form of cancer treatment known as immuno-oncology. It aims to file its most advanced immunotherapy candidate, MEDI4736, for the treatment of lung cancer, in the first half of 2016. While it has already been beaten to first place by rivals Bristol-Myers Squibb Co. and Merck & Co., Astra hopes that its broad pipeline will stand it in good stead for combination therapies.

AstraZeneca said its board recommended an unchanged interim dividend of 90 cents.

Write to Denise Roland at [e-mail]

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