AstraZeneca's first half results were in line with expectations, reflecting the anticipated near-term impact of key patent expiries. The shares rose by over 3% in response to the news.
Total revenue was down by 3% at constant currency (-5% at actual exchange rates) reflecting a 2% decline in Product Sales. Core operating profit declined by 14% to $2,999m in the half, but the interim dividend per share was held at $0.90, as expected.
The decline in Product Sales was driven by the US market entry of a Crestor generic medicine in the second quarter, as well as the ongoing impact of Nexium generic medicines in the US. Overall US Product Sales declined by 7% in the half, with Product Sales in Europe down by 3%. Sales in the Established Rest Of World (ROW) declined by 4%, but Emerging Markets grew by 7% led by strong growth in China (+11%).
The Growth Platforms grew by 7% in H1, and now account for over 60% of revenue. The drug pipeline is said to be advancing "quickly and delivering a rich flow of differentiated medicines".
The group continues to expect total revenue and core earnings per share (EPS) for the year to decline by a low-to-mid single digit percentage at constant exchange rates. There is now expected to be only a minimal adverse impact from currency movements on total revenue in FY 2016, while core EPS is now expected to benefit from currency movements by a low to mid single-digit percentage versus the prior year.
A number of AstraZeneca's key drugs have come off patent over recent years, allowing competing, generic drug versions in to the market. This has led to substantial pricing pressures and loss of sales. In May 2016, the US patent for Crestor (20% of group sales in FY15) expired, which has resulted in declining sales and profits for the group.
Other parts of AstraZeneca's drug portfolio are performing better. Key growth platforms, which include Brilinta (heart treatment), Diabetes, Respiratory, Emerging Markets and Japan, achieved high-single digit sales growth in the first half of 2016; and now account for 61% of total sales.
AstraZeneca recently added a sixth growth platform to the mix - new cancer drugs. Astra has a deep-rooted heritage in cancer medicine and is developing a number of next-generation cancer therapies which have the potential to redefine the way we treat the disease.
Longer term, CEO, Pascal Soriot is backing AstraZeneca's drug pipeline to reignite growth. By 2023, he is targeting annual revenues in excess of $45 billion, up from $26 billion last year, fuelled by the new blockbuster treatments he hopes to bring to market.
If Mr Soriot's projections are proved right, profits ought to be a lot higher in 8 years' time. If the pipeline fails to live up to expectations, investors will be buying into a declining drug portfolio with little or nothing to replace these lost sales. For now, investors are being offered a yield of 4.4% to wait and see if the long term strategy bears fruit.
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