AstraZeneca's Profits Contract Despite 12% Sales Growth in 2007

Ongoing restructuring efforts, a slump in sales of key drugs, higher R&D investment and the effects of the MedImmune takeover hit Anglo-Swedish giant AstraZeneca's bottom line in 2007, with operating income declining by 4% year-on-year (y/y) to US$7.36 billion (as calculated by Global Insight). For the full year, the company's worldwide sales were up 12% on an as-reported basis to US$29.56 billion. In 2007, the United States was the slowest growing region in terms of sales growth, gaining 7% y/y, while sales in emerging markets rose at 24% y/y.

Expenses rose across the board in 2007 and were topped by R&D costs, which went up 32% y/y. This reflected the company's commitment to boosting its R&D pipeline, as 36 new compounds were selected for development, 24 compounds progressed to early clinical studies and six compounds moved to Phase III clinical trials. AstraZeneca's corporate restructuring programme, implemented at the start of 2007 (see United Kingdom: 2 February 2007: AstraZeneca Braces for Leaner Times with 3,000 Redundancies as Operating Profit Jumps 22%), resulted in costs of US$362 million during the fourth quarter, bringing the total for the full year to US$966 million, which was above the US$900 million the company had anticipated. Completion of the acquisition of U.S. biotech company MedImmune in June 2007 also affected full-year profit as it forked out US$15.6 billion to seal the deal (see United States - United Kingdom: 23 April 2007: AstraZeneca to Buy MedImmune for US$15.6 bil.).

The gastrointestinal and cardiovascular franchises remain the company's top earners, although some bestsellers experienced a significant decrease in sales. Across the regions at current exchange rates, sales of Nexium (esomeprazole) were down by 2% y/y for the full year to US$5.21 billion while U.S. sales were down 4% y/y, as competition from generic omeprazole started to bite. Heart burn drug Losec/Prilosec (omeprazole) also suffered heavy losses, with global sales down 20% y/y during the full year. The drug has fallen victim to generic competition and cuts to pricing and reimbursement in all major markets. Generic competition also hurt U.S. sales of antihypertensive Toprol-XL (metoprolol succinate), which in 2007 plummeted by 30% y/y on an as-reported basis. This had a knock-on effect on the drug's global sales, which were down by 20% y/y on an as-reported basis to US$1.44 billion.

On the brighter side, at current exchange rates sales of anti-depressant Seroquel (quetiapine fumarate) went up 15% y/y to reach US$4.02 billion for the year, while sales of anti-cholesterol drug Crestor (rosuvastatin calcium) fared very well over the year, rising by 33% y/y to stand at US$2.79 billion. Asthma treatment Symbicort (budesonide, formoterol) also performed well as turnover grew by 22% to US$1.57 billion. AstraZeneca's total "infection and other products" franchise grew by an inflated 89%, due to the recent inclusion of intranasal influenza vaccine FluMist and respiratory drug Synagis (palivizumab) in this category. In 2007, MedImmune contributed US$714 million of AstraZeneca's turnover.

Outlook and Implications

The company has presented guidance for 2008 of low-to-mid single digit growth in turnover at constant currency rates, and has plans for a string of measures to boost productivity and profits. First, AstraZeneca hopes to cash in on its restructuring efforts and expects to save US$1.4 billion by 2010. Secondly, the company will also focus on R&D (see United Kingdom: 17 October 2007: AstraZeneca to Outsource All Drug Production in Quest to Become "Pure" R&D Company) and improve productivity through major changes in strategy. It hopes to launch an average of two new medicines a year from 2010 onwards. Involvement in the development of small molecules for the treatment of cancer, respiratory and inflammatory diseases will be reduced and research activities in the field of biologics will be increased, so that the latter should have a late pipeline share of 25% by 2010. In 2008, the company hopes to file up to three new compounds for regulatory approval.

The question is whether AstraZeneca's efforts will pay off and whether its goals are realistic. Threats of generic competition across the board seem to have been played down. As Nexium faces competition from generic omeprazole and pricing pressures, a new generic player has just entered the U.S. market which is likely to erode the drug's sales even further (see United States: Wyeth Takes Generic Route for Protonix). Generic threats are also looming over Crestor (see United Kingdom: 12 December 2007: AstraZeneca Sues Seven Generics Firms over Crestor ANDAs). Even if AstraZeneca manages to fend these problems off for now, the current climate is heavily in favour of promoting generic statins (see United Kingdom: 29 December 2006: Increased Prescription of Generic Statins Could Save U.K. NHS at Least US$167 mil.). Other top earner Seroquel is not immune from a generic threat either, while Casodex will lose patent protection in October this year (see United Kingdom - Switzerland; 12 April 2007: Sandoz Plans to Sell Generic Version of AstraZeneca's Seroquel).

On the pipeline front, the company is banking on getting new molecules to the market to offset loss of revenues. Although AstraZeneca has stepped up and refocused its R&D efforts, its track record shows that it did not get a single new molecule to the U.S. or European market in 2007, while established drugs have failed to deliver in additional therapeutic indications (see United Kingdom: 6 November 2007: Heartache for AstraZeneca as Crestor Fails to Prevent Adverse Cardiovascular Events and World: 19 March 2007: Crestor Fails on Atherosclerosis).