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AstraZeneca Braces for Leaner Times with 3,000 Redundancies as Operating Profit Jumps 22%

Published: 2/2/2007 by Kenneth Yeasting
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The United Kingdom’s AstraZeneca has announced plans to cut some 3,000 jobs over the next three years as it delivered a strong performance in line with expectations for 2006.

Global Insight Perspective

 

Significance

The redundancies, trimming around 4.6% of AstraZeneca’s global workforce, are designed to “improve asset utilisation” in AstraZeneca's global supply chain as part of an ongoing productivity programme.

Implications

The announcement came as AstraZeneca reported a 22% hike in operating profit on sales of US$26.5 billion (+11%) for 2006. The company’s five key brands (Nexium, Seroquel, Crestor, Arimidex, and Symbicort) continued to provide the main engine of growth, with combined sales up by 23% at constant exchange rates (CER) over 2005.

Outlook

The cost-cutting programme and a recent spate of deals to freshen up AstraZeneca’s R&D pipeline are a recognition that, for all its current momentum, the company could face a much bleaker future as generic competition on key brands starts to kick in and the holes in its late-stage pipeline become more critical.

Delivering another exemplary set of results for the fourth quarter and 2006, yesterday AstraZeneca (AZ) was at pains to show it had its eye on the long term. Dire warnings about the attenuated research and development (R&D) pipeline and its implications for the company’s finances once its current stable of blockbusters starts to run out of juice are by now commonplace.

So, instead of having its latest financial presentation overshadowed by news of another late-pipeline failure, as happened in October 2006, AZ softened up investors with a triple dose of deals illustrating its determination to inject new blood into an R&D programme that has now been slimmed down and refocused following a much-publicised series of damp squibs such as Iressa, Galida, Exanta, and, most recently, the scrapped stroke drug NXY-059 (see United Kingdom: 1 February 2007: AstraZeneca Strikes New Deals with Palatin Obesity Partnership, Acquisition of Arrow Therapeutics and United Kingdom: 31 January 2007: AstraZeneca Signs COPD Drug-Development Deal with Argenta).

The complement to these R&D investments was a further announcement demonstrating a commitment to long-term productivity and cost-control. While AZ’s operating margin for 2006 edged up to 29.0% from 26.3% in the previous year despite a 16% increase in R&D spending (+29% in the fourth quarter), it sees tougher times ahead “during a period when the company, as well as the industry, faces the challenges posed by patent expirations and pricing pressures from government and private-sector payers”.

Accordingly, AstraZeneca is cutting around 4.6% of its workforce—some 3,000 positions in total—over the next three years in an effort to “improve asset utilisation within its global supply chain”. Details of the production rationalisation, which will incur estimated charges of US$500 million (of which around US$300 million will be in cash), need to be thrashed out with works councils, trade unions, and other employee representatives, and as yet there is a no clear indication of where the axe will fall. Inevitably, the domino effect of U.S. pharma supreme Pfizer’s plans to weed out around 10,000 of its employees worldwide has been cited (see United States: 23 January 2007: FY2006: To Heal, Pfizer Cuts Deeper Into the Skin), although AstraZeneca’s initiative—which the U.K. company said was part of an ongoing drive to improve productivity—does not extend to a bloated sales force.

Meanwhile, the annual results presentation once again found AstraZeneca in rude financial health for the short and medium terms. Sales for the year were 11% higher at US$26.5 billion, with a 14% increase to US$7.2 billion for the fourth quarter. Operating profit, according to Global Insight’s calculations, came in at US$7.7 billion for the year—a 22% improvement over 2005—and at US$1.9 billion (+20%) for the quarter.

AstraZeneca Results for Q4 and Full-Year 2006

 

Q4 (US$ mil.)

% change (US$)

2006 (US$ mil.)

% change (US$ mil.)

Sales

7,154

14

26,475

11

Cost of Sales

1,578

14

5,559

4

Distribution Costs

61

9

226

7

R&D Spending

1,124

29

3,902

16

R&D as % of Sales*

15.7

N/A

14.7

N/A

Selling, General, and Administrative (SG&A) Expenses

2,511

4

9,096

5

Operating Income*

1,880

20

7,692

22

Operating Margin*

26.3

N/A

29.0

N/A

Net Profit

1,445

18

6,063

28

Source: AstraZeneca
* Global Insight calculation. Operating profit is calculated as sales minus R&D expenses, cost of sales, SG&A expenses, and distribution costs.

AstraZeneca’s core stable of five key growth brands (Nexium, Seroquel, Crestor, Arimidex, and Symbicort) continued to deliver handsomely, with combined sales of US$13.3 billion rising by 23% at CER over 2005. Particularly strong was the cholesterol management drug Crestor (rosuvastatin), which in the previous year had been buffeted by accusations of a link with kidney failure. In the United States, where AZ has been advertising the drug heavily, Crestor sales were up by 57% at CER and the brand’s share of new prescriptions in the statins market expanded by 2.7 percentage points, to 9.6% in December 2006. Crestor sales overall rose by 59% at CER to US$2.0 billion for the year.

Also outstanding among the growth brands were breast cancer treatment Arimidex (anastrazole), with sales up 29% to US$1.5 billion, and Seroquel (quetiapine) for schizophrenia and bipolar disorder, which gained 24% to US$3.4 billion. As in 2005, Seroquel was the only brand among the three leading anti-psychotics in the U.S. market to improve its market share of overall prescriptions in 2006, AstraZeneca noted.

AstraZeneca’s Product Sales in 2006

 

Full Year (US$ mil.)

% change (US$)

% change (CER)

Gastrointestinal

6,631

4

4

Nexium

5,182

12

12

Losec/Prilosec

1,371

-17

-16

Others

78

11

11

Cardiovascular

6,118

15

15

Seloken/Toprol XL

1,795

3

3

Crestor

2,028

60

59

Atacand

1,110

14

14

Tenormin

320

-9

-7

Zestril

307

-8

-7

Plendil

275

-24

-24

Others

283

-9

-9

Respiratory

3,151

10

10

Pulmicort

1,292

11

11

Symbicort

1,184

18

18

Rhinocort

360

-7

-7

Oxis

88

-3

-3

Accolate

81

13

13

Others

146

-6

-6

Oncology

4,262

11

12

Arimidex

1,508

28

29

Casodex

1,206

7

9

Zoladex

1,008

0

1

Iressa

237

-13

-11

Others

303

15

16

Neuroscience

4,704

16

16

Seroquel

3,416

24

24

Local anaesthetics

529

4

5

Zomig

398

13

13

Diprivan

304

-18

-17

Others

57

-14

-12

Infection/other products

875

4

4

Merrem

604

20

19

Other products

271

-19

-18

Aptium Oncology

374

12

12

Astra Tech

360

15

16

Total

26,475

11

11

Source: AstraZeneca
CER = constant exchange rates

Outlook and Implications

Investors reacted well to AstraZeneca’s robust performance, its cost-cutting initiative, and its decision to buy back US$4 billion worth of shares this year. But there were clear signs of a chill around the corner, with the antihypertensive Toprol XL (metoprolol succinate) already starting to suffer from early generic competition in the U.S. market (U.S. sales were down by 20% at CER in the fourth quarter) and more subdued sales growth “in the high single digits” expected across the company in 2007.

AstraZeneca admits it has more to do to patch up its R&D pipeline but also insists it has the funds to continue pursuing the kind of deals seen over the last week. Since December 2005, it noted, the company has entered into 12 “significant business transactions”—3 company acquisitions and 9 significant research collaborations. These moves have added five Phase II and two Phase III molecules to AstraZeneca’s latter-stage pipeline. Chief executive David Brennan denied, however, that any “transformational” acquisitions were part of the plan.

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