AstraZeneca reported strong fourth-quarter results that exceeded both our expectations and those of consensus, partly driven by a low tax rate. However, the company also issued 2013 guidance of a mid-to-high singledigit decline in sales with a faster decline in earnings, which is slightly lower than projected declines for sales and earnings.
While AstraZeneca is launching several potential blockbusters with Onglyza (diabetes), Brilinta (cardiovascular) and Forxiga (diabetes), patent losses will likely cause overall sales to fall more than 5% in 2013. We expect this trend to continue for several years as the firm faces one of the longest patent cliffs in the industry and new product launch trajectories are lower than in past years largely due to increased payer pressures.
Additionally, AstraZeneca’s weak pipeline was further negatively affected with the disappointing efficacy of fostamatinib relative to Humira in a Phase IIb study that was released over the past quarter. We believe the weak pipeline increases the likelihood that AstraZeneca will look for a major acquisition in 2013, and we think Forest Laboratories FRX is a likely target, as its valuation looks attractive and the firm holds several recently approved drugs.
AstraZeneca continues to support its dividend and expects to make increases in the near term despite likely earnings declines. The company views the appropriate payout ratio at 50% for not just one particular year, but over the entirety of the investment cycle, which it defined as five to 10 years. While this strategy increases our confidence in the stability of the dividend, we still believe the pipeline will need to make significant improvements ahead of the 2016 patent loss on cholesterol-lowering drug Crestor to avoid a dividend cut.
Turning to the quarter, AstraZeneca posted strong results with a lower-than-expected tax rate supporting the outperformance. However, based on guidance, we don’t expect a material change to our long-term tax rate assumptions. Outside of taxes, the research and development spending came in a little low, which helped the quarter, but increases our concerns about AstraZeneca’s weak pipeline and the need for increased investments to improve the company’s long-term growth.
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