AstraZeneca (AZN) reported first-quarter results that largely matched our expectations, and we don't anticipate changing our fair value estimate. Total sales fell operationally 4% year over year as patent losses weighed on growth. Earnings per share increased 10% from the prior year largely because of a tax benefit. Astra increased its 2011 EPS forecast by $0.05, to $6.95-$7.25, which we expect it will meet.
While new products contributed to the top line in the quarter, they were more than offset by patent losses. We expect this trend will continue over the next several years as Astra faces one of the steepest patent cliffs in the industry. Patent losses on cardiovascular drug Toprol-XL and oncology drug Arimidex hurt growth in the quarter. We expect further patent losses to create a drag on growth for several years. In particular, the patent loss on neuroscience drug Seroquel in 2012 will have a significant negative impact, given that the drug posted close to $5 billion in 2010 (15% of total sales).
We expect certain new drug launches will help offset the generic competition. Diabetes drug Onglyza continues to gain traction, albeit at a slower pace than we had originally projected. Nevertheless, we continue to expect the drug will develop into a blockbuster. Also, Astra is approaching two critical PDUFA dates: July 21 for Brilinta (cardiovascular) and Oct. 28 for dapagliflozin (diabetes). Given the approval from an Food and Drug Administration advisory committee last July, European approval already granted, and solid Phase III data, we project an 80% chance of approval for Brilinta. For dapagliflozin, we project a 65% chance of approval based on strong efficacy data from Phase III trials, but some side effects (urinary tract infections) lower our expectations with the risk-sensitive FDA.
A favourable tax settlement and a one-time gain from a patent settlement from PDL Biopharma caused EPS growth to outpace the sales decline. While Astra continues to implement a cost-saving plan, costs related to U.S. health-care reform caused selling, general, and administrative costs as a percentage of sales to increase 200 basis points year over year. This trend should continue for the remainder of the year, but subside in 2012. Mitigating the SG&A costs, Astra reached a tax settlement with U.K. and U.S. government agencies, which reduced the tax rate more than 800 basis points. However, we don't expect this favourable tax rate will last over the long term.
Damien Conover, CFA is an Equity Analyst with Morningstar.
