Generic competition dents sales at Astra - UPDATE

Gross margins at AstraZeneca held up well in the first quarter, but the pharmaceuticals giant saw sales tumble as generic competition to its drugs ramped up.

Astra, which reports in dollars, saw total revenues in the three months to June 30th of $6.66bn, a 21% drop on 2011 and well below the consensus estimate of $6.88bn, as sales of its schizophrenia treatment, Seroquel, took a tumble. As well as the threat from generics, revenues were also dented by IT issues at one of its plants in Sweden - these negatively affected group revenues by 2%.

The company has lost "exclusivity" on several of its most important brands, meaning the patent has run out and the generic manufacturers can start offering versions of the drug, invariably more cheaply than Astra chooses to. Astra estimates this is responsible for around half of the revenue decline.

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Chief Financial Officer Simon Lowth said of today's results: "As we expected, the loss of exclusivity on some key brands and tough market conditions have resulted in a decline in revenue and earnings in the second quarter." He added though that he still felt the group was "on track" to achieve its full-year targets.

Core profits before tax totalled $2.164bn, a decline on 2011 of 33%, or 28% at constant exchange rates. Nevertheless, the group reported that the gross margin contraction was limited to only 40 basis points sequentially to 79.9%, "the most please aspect" of the results, according to analyst Savvas Neophytou from Panmure Gordon. He said that the loss over the very high-margin schizophrenia treatment, Seroquel, was expected to drag the gross margin down to 78.2%.

Things are likely to get tougher for AstraZeneca as the patents expire on a series of key drugs between now and 2015, including on Seroquel. In 2016 Astra's highly lucrative statin drug, Crestor, loses its patent in the all-important US market, where it is already suffering from generic versions of its rival, Pfizer's, Lipitor statin treatment.

The first interim dividend will be $0.90 per share, set at around a third of prior year's full-year dividend of $2.80.

Despite the disappointment in sales, shares were trading 0.15% higher at 2,913.5p before the end of trade on Thursday. Panmure Gordon maintained its 'buy' recommendation for the stock today, saying that its target price of 3,100p represents "fair value" based on a 20% discount to its European peers.

"G iven its perceived increased forecast risk following its Q1 2012 profit warning, we believe the stock deserves to trade at a discount to its peer group," Neophytou said.

BS/BC