AZN AstraZeneca PLC

By Denise Roland 

LONDON-- AstraZeneca PLC warned earnings would fall this year as it continues to plow investment into research and development and expects a sharp drop in sales for one of its blockbuster drugs, surprising investors and sending shares down more than 5%.

London-based Astra said it expected "core" earnings per share--which strip out exceptional items--to decline in the low to mid-single digits range in 2016, at constant currencies. That surprised investors, who had expected the company would keep earnings guidance flat.

Astra also said that it anticipates sales for Crestor, its cholesterol drug, to fall this year as its patent expires.

Despite those headwinds, Astra said it would continue to fund its costly research and development at 2015 levels throughout the coming year. It said, however, it would "materially reduce" sales and general administrative expenses to help rein in costs.

In early trading in London, Astra shares were down 231 pence, or 5.2%, at 4182 pence.

The fresh guidance also raised questions over next year's remuneration of AstraZeneca's top executives, whose pay has historically been linked to a core EPS target of $4.20--a level which will be breached should it fall more than 1.4% from this year's $4.26. Chief Executive Pascal Soriot said the remuneration committee would make those decisions "when they have the facts in hand and consider all the elements." He noted that the guidance included the dilutive effect of Astra's $2.7 billion acquisition of ZS Pharma and a $4 billion deal to buy a controlling stake in Acerta Pharma, both announced late last year, and that the committee would need to decide whether to take that into account.

The decision to hold research spending steady, rather than reduce it, shows the pressure AstraZeneca is under as it furiously pushes a growing pipeline of upcoming drugs, in order to replace the revenue lost from older drugs, some of which, such as Crestor, are facing the end of their patent protection. "Investment on R&D at AstraZeneca has increased quite dramatically over the past few years," said Sean Bohen, head of global medicines development. "We now are at a sustainable level and are going to keep it there."

That pipeline was a key plank in Mr. Soriot's defense against an unsolicited, and ultimately failed, takeover bid by Pfizer Inc. in 2014. At the time, he promised investors Astra was more valuable as a stand-alone company because of the growth these new drugs promised.

The AstraZeneca boss, who has vowed to increase annual revenue at AstraZeneca to $45 billion by 2023, compared with the $24.7 billion generated in 2015, said he was focused on "building the long term future of the company."

The profit warning came as Astra posted net income of $808 million in the quarter ending Dec. 31, compared with a loss of $321 million in the year-earlier period. It reported revenue of $6.4 billion, a 5% decrease from $6.7 billion a year ago. Stripping out the effect of the strong dollar, sales increased 2%.

Core net profit, a measure which strips out certain one-time items, rose 26% to $1.2 billion. Analysts expected revenue of $6.3 billion and core net profit of $1.2 billion.

The company's financial results were boosted by proceeds from a series of licensing deals that involve AstraZeneca relinquishing the rights to develop and commercialize certain drugs in its pipeline in return for an upfront payment, along with "milestone" payments garnered along the way if the drug meets certain financial targets.

In the fourth quarter, AstraZeneca received $192 million from such deals. Mr. Soriot has said this so-called externalization strategy allows Astra to focus on the diseases where it has most expertise while creating value from those drugs that sit outside these areas.

Product sales, at $6.2 billion, were flat at constant currencies compared with a year earlier, as the growth of new products helped offset the revenue decline from Astra's older drugs, which are facing cheaper competition following the loss of their patent protection.

AstraZeneca said its so-called growth platforms--the products it is betting on for future expansion--generated $3.6 billion in sales in the fourth quarter of the year, up 11% from a year earlier at constant currencies.

The company said it would pay a second interim dividend of $1.90 per share, bringing the dividend for the full year to $2.80, and reiterated its commitment to a progressive dividend policy.

Write to Denise Roland at Denise.Roland@wsj.com

(END) Dow Jones Newswires

February 04, 2016 08:38 ET (13:38 GMT)

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