Industry Trend Analysis - Generic Competition To Continue To Hurt AstraZeneca Revenues - JUNE 2017


BMI View : AstraZeneca's shareholders will keep a close eye on the company's management ' s strategy, the late-stage R&D pipeline and newly launched USD1.1bn cost-cutting plan. While investor focus on company activity has been strong since the decline in sales of the company ' s top blockbuster drugs - Nexium lost patent protection in the US in February 2015 and Crestor experienced patent expiry in the US in 2016 - the focus on company direction will be even stronger in 2017. AstraZeneca has faced a large shareholder rebellion over its pay arrangements for the company ' s chief executive and chief financial officer, with almost 40% of investors oppos ing the drugmaker ' s pay report for 2016.

Multinational drugmaker AstraZeneca reported revenues of USD5,405mn in Q117, a 10% decrease on Q116 figures in constant exchange rate (CER) terms and a 12% decrease in actual terms. This reflects a decline in product sales driven by patent expiries; in particular Crestor (rosuvastatin) in the US. Net profit for the period was USD512mn, down from USD625mn in Q116.

Declining Revenues
AstraZeneca: Financial Snapshot (EURmn)
Source: AstraZeneca

AstraZeneca's top-selling cholesterol-busting drug Crestor lost its patent in the US in Q216. The drug, which previously accounted for a large proportion of the company's annual revenues and was a high-margin asset, recorded a sales decline of 44% in CER terms and 45% in actual terms to USD631mn in the first quarter of 2017, acting as a drag on overall group profits. In the US, Q1 2017 sales of Crestor declined by 82% to USD112mn, reflecting the market entry in July 2016 of multiple Crestor generic medicines. In Q117, AstraZeneca's other blockbuster drug, Nexium (esomeprazole) recorded sales of USD416mn (+1% in CER terms and flat sales in actual terms). In the US, Nexium sales rose by 4% in actual terms to USD136mn, reflecting favourable pricing, which offset a decline in volume demand and inventory destocking that followed the loss of exclusivity in 2015.

Emerging Markets

Emerging markets, representing 32% of total product sales, was the largest sales region for AstraZeneca in Q117. AstraZeneca's emerging markets product sales increased by 9% in CER terms (7% in actual terms) to USD1,562mn. This was in contrast to the US and Europe which reported a 34% and 3% decline in sales in CER terms respectively - attributed to generic competition to its products and price pressures. In the Established Rest of The World Region (Japan, Canada and other established markets), AstraZeneca reported a 2% increase in sales in CER terms. In 2016, emerging market sales rose by 6% in CER terms to USD5,794mn. In 2016, emerging markets sales surpassed Europe sales for the first time.

China continues to be a key market for AstraZeneca; sales in the year increased by 7% in CER terms (+1% in actual terms) to USD782mn accounting for 50% of total Q117 emerging market sales. With regards to year-to-date figures, China sales grew by 10% to USD2,027mn, representing 45% of emerging market sales. Alongside the additions of Onglyza (saxagliptin) and Iressa (gefitinib) on the NRDL in China, Brilinta (ticagrelor), Faslodex (fulvestrant) and Seroquel XR (quetiapine) entered the negotiation list in the quarter, with discussions on their potential reimbursement in progress. Crestor also had its 2nd-line usage restriction removed and Zoladex (goserelin acetate) was reclassified from the hormone and endocrine classification to oncology, which is expected to continue to support growth.

Despite these positive emerging market financials, AstraZeneca highlighted challenges in a select number of markets. Sales in Brazil and Russia continued to be adversely impacted by challenging macro-economic conditions, leading to a subdued sales increase of 2% (down by 19% at CER) to USD85mn in Brazil; Russia sales grew by 15% (down by 10% at CER) to USD55mn. Product sales in Middle East, Africa and other markets increased by 21% (33% at CER) to USD247mn.

Share Price Performance

On the day of its earnings call (April 27 2017), AstraZeneca shares closed down 0.40%, outperforming its industry peers (FTSE 100 Index, -0.71%). Over a one-year period, AstraZeneca (+16.4%) outperformed the FTSE 100 Index (+14.7%).

AstraZeneca: Outperforming
The Relative Share Performance Of AstraZeneca & The FTSE100
Source: Bloomberg

Recent Developments

April 2017

The European Commission (EC) granted full marketing authorisation for Tagrisso (osimertinib) for the treatment of adult patients with locally-advanced or metastatic epidermal growth factor receptor (EGFR) T790M mutation-positive non-small cell lung cancer (NSCLC).

AstraZeneca marked a key milestone in its successful move to Cambridge, UK, with the 'topping out' of its new, state-of-the-art, strategic R&D centre and global corporate headquarters at the heart of the Cambridge Biomedical Campus (CBC). The Company, including its biologics research and development arm, MedImmune, already has 2,000 employees actively engaged in the city's scientific, academic, clinical and business community. Occupation of the site will begin in stages in 2018.

March 2017

The US FDA granted full approval for Tagrisso, for the treatment of patients with metastatic epidermal growth factor receptor (EGFR) T790M mutation-positive non-small cell lung cancer (NSCLC), as detected by an FDA-approved test, whose disease has progressed on or after an EGFR tyrosine kinase inhibitor (TKI) therapy. Tagrisso is the first and only approved medicine in the US indicated for NSCLC patients who have tested positive for the EGFR T790M mutation, and efficacy data suggest it may be a new standard of care for these patients.

MedImmune announced that the European Medicines Agency (EMA) had granted orphan designation to inebilizumab (formerly MEDI-551) for the treatment of neuromyelitis optica spectrum disorder (NMOSD). Developed by MedImmune, inebilizumab is currently in Phase IIb clinical development for NMOSD.

The China Food and Drug Administration (CFDA) granted marketing authorisation for Tagrisso for the treatment of adult patients with locally-advanced or metastatic epidermal growth factor receptor (EGFR) T790M mutation-positive non-small cell lung cancer (NSCLC) whose disease has progressed on or after EGFR tyrosine kinase inhibitor (TKI) therapy.

February 2017

The US FDA approved once-daily Qtern (10mg dapagliflozin and 5mg saxagliptin) for the treatment of type-2 diabetes. The new medicine is indicated as an adjunct to diet and exercise to improve glycaemic (blood sugar level) control in adults with type-2 diabetes who have inadequate control with dapagliflozin (10mg) or who are already treated with dapagliflozin and saxagliptin.

AstraZeneca's partner Valeant Pharmaceuticals announced that the US FDA had approved Siliq (brodalumab) injection for the treatment of adult patients with moderate-to-severe plaque psoriasis who are candidates for systemic therapy or phototherapy and have failed to respond or have lost response to other systemic therapies.