Cost cuts and castoffs help AstraZeneca power past Q1 earnings forecast

soriot
AstraZeneca CEO Pascal Soriot's divestment strategy has drawn heat from critics who say it's unsustainable.

Say what you want about AstraZeneca’s castoff strategy, but it helped drive another earnings beat for the lacking-in-sales drugmaker to kick off the year.

And this time, it was a big one. Sell-off revenue of $562 million—which topped consensus by $67 million and made up 10% of AZ’s $5.41 billion top-line haul—pushed (PDF) core earnings to 99 cents per share, good for an outperformance of 18 cents.

Of course, the company won’t necessarily be able to keep up that clip, and with sales falling short—even among AZ's so-called growth products—the questions about its offloading moves are likely to continue. Company execs warned that quarterly results this year aren't likely to be consistent. “We have an overall target and guidance for the year, but this is going to bounce around a little bit from quarter to quarter,” CEO Pascal Soriot told investors.

RELATED: Biopharma's Q1 earnings, all in one place

All the recent focus on divesting non-core assets—such as gout med Zurampic, which went to Ironwood; a stable of antibiotics that Pfizer nabbed; and an anesthetics portfolio AZ sent to Aspen—has worried some industry-watchers who deem the practice unsustainable. “Earnings quality concerns persist,” as Bernstein analyst Tim Anderson wrote in a note to clients Thursday.

But the pharma giant’s cost-cutting measures added a positive note to results, too, with R&D costs coming in 3% lower than the year-ago quarter and sales, general and administrative (SG&A) expenses registering 12% lower. CFO Marc Dunoyer attributed the “important progress we have made toward taking costs out of the businesses” partly to the simplification of shared services, including back- and mid-office activities.

RELATED: AstraZeneca plots cost cuts to save $1.1B as Crestor generics loom

“Gross margin was better than expected for the second Q running and contributed to half of the beat,” Anderson noted.

Bright spots were harder to find in the product performance department, with a $4.84 billion product sales tally falling short of $4.92 billion predictions. While Crestor held up better against U.S. generics than expected, fellow off-patent blockbuster Nexium met forecasts and Seroquel performed worse. And even the growth products AZ’s been touting—including blood thinner Brilinta, cancer-fighter Lynparza and diabetes drug Farxiga—fell short of where analysts thought they’d be.

Lung cancer therapy Tagrisso, with $171 million in quarterly sales, stood out as one of the few meds to meet Street estimates.

RELATED: Top 15 pharma companies by 2016 revenue—11. AstraZeneca

Still, though, AstraZeneca is hoping 2017 can mark a key point in its turnaround, largely because of the checkpoint inhibitor trials it has in progress. The company is counting on I-O candidate durvalumab to make a splash in lung cancer, but some analysts—including Anderson—are wary.

As he flagged for clients, all eyes are still on AZ’s Mystic trial, which is testing a durvalumab-CTLA4 combo and solo durvalumab in non-small cell lung cancer. But readout from another trial, Arctic—which is examining the combo and monotherapy in a different patient population—has been delayed, AZ announced Thursday, and Anderson posited that the slowdown could mean “a negative trial.”

“We have been worried this trial will likely fail, which could have a partial negative read-through to [Mystic], but timing has (conveniently?) been pushed back now, deferring this issue,” he wrote.