AstraZeneca's Investment Eats Into Profit -- 2nd Update

By Denise Roland 

LONDON-- AstraZeneca PLC said core profit fell in the first quarter even as revenue rose, as it plowed heavy investment into the development of a string of new drugs it is betting on for growth, though net income rose.

The U.K.-based drugmaker said core operating profit decreased 12% to $1.6 billion, from $1.8 billion a year earlier. Revenue increased 1% to $6.13 billion, from $6.06 billion a year earlier. The strength of the dollar cut into the company's reported figures: Stripping that out, operating profit fell 8%, while revenue climbed 5%.

That was in part due to higher research spending, which climbed 15% to $1.4 billion, though it also reflected a drop in income from items such as disposals and royalty payments.

Net profit increased 17% to $646 million, from $550 million a year earlier as a result of lower amortization charges.

Astra is furiously investing in its pipeline of new drugs to return the company to growth following a succession of patent expirations on its old blockbusters. The last of those--Crestor for lowering cholesterol--is expected to face competition from a cheaper copycat from next month.

The company is also reinforcing its pipeline by gobbling up smaller biotech companies. Astra said part of the overall increase in research spending came from its absorption of research costs for two recent acquisitions, ZS Pharma and Acerta Pharma.

It is betting that these new drugs won't just replace lost revenue but catapult the company up the pharmaceutical rankings. Chief Executive Pascal Soriot told investors that AstraZeneca, which posted sales of $25 billion in 2015, could generate $45 billion in revenue by 2023. By comparison, the world's three largest drugmakers-- Pfizer Inc., Novartis AG and Roche Holding AG--posted sales of around $50 billion in 2015. That promise was a key plank in his defense against an unsolicited, and ultimately failed, takeover bid by Pfizer in 2014.

Astra's newly-restocked pipeline also reflects a shift to specialty care, a term for illnesses such as cancer that are handled by specialist physicians. Historically Astra was almost entirely focused on primary care diseases, or those treated by generalist or family doctors.

The change means that Astra's research budget will continue to be higher than in the past, as specialty medicines require more clinical trials to develop, according to Mr. Soriot. At the same time, it will lead to a reduction in commercialization costs. Specialty care drugs require a fraction of the sales force for a primary care drug as they are used by far fewer physicians.

Mr. Soriot said the company would spend the next two years reducing its sales staff while re-directing some of the savings into the research budget, in a program that would yield $1.1 billion in net savings from 2018 onwards. The company said it expected to spend $1.5 billion on the restructure.

Some new drugs are already showing promise. Revenue from AstraZeneca's so-called "growth platforms," including new medicines for cancer, diabetes and heart and respiratory diseases, increased 6% to $3.4 billion. But falling revenue from old blockbusters such as Nexium for heartburn and inhaler drug Symbicort weighed on overall product sales growth, which edged up 1% to $5.6 billion at constant currencies.

At the same time, AstraZeneca is licensing out the rights to pipeline drugs that don't sit within its core focus areas to raise cash for those that do. In the first quarter, it raised $550 million in proceeds from licensing deals, up from $309 million a year earlier. That so-called externalization revenue helped boost Astra's top line.

The company confirmed that it expected total revenue and core earnings per share to decline by a low-to-mid single-digit percentage in 2016.

Write to Denise Roland at [e-mail]

(END) Dow Jones Newswires

April 29, 2016 06:01 ET (10:01 GMT)

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