AstraZeneca flags tough 2017, yet confident on key cancer trial

By Ben Hirschler LONDON (Reuters) - AstraZeneca warned on Thursday that profit and revenue would both fall this year as cheap generic versions of its cholesterol drug Crestor continue to hit sales. The British pharmaceuticals group hopes that 2017 will be the earnings trough, but its recovery hinges on the success of new medicines and results from a clinical trial of a combination of two lung cancer drugs, which investors view as risky. Chief Executive Pascal Soriot reaffirmed his confidence in the trial, despite recent mixed developments in the hotly contested cancer immunotherapy arena. "Everyone is trying to read the tea leaves and a number of people are using bad tea," he said. This year AstraZeneca expects a low to mid single-digit percentage decline in revenue, with core earnings per share (EPS) dropping by a low to mid-teens percentage in local currency terms from 2016's level of $4.31. This implies that, for the first time, Soriot will miss the $4.20 EPS threshold needed to cover the company's dividend at least 1.5 times, which is one factor determining his bonus. AstraZeneca has lost exclusivity on all its top-selling drugs in recent years but believes that it is about to turn the corner. It has offset falling sales by divesting some non-core assets, resulting in fourth-quarter 2016 core EPS, which excludes some items, rising 29 percent in dollar terms to $1.21 on revenue which fell 13 percent to $5.59 billion. The consensus forecast among industry analysts was for quarterly revenue of $5.57 billion and earnings of $1.13 per share, Thomson Reuters data shows. AstraZeneca shares ended 0.6 percent higher on Thursday as investors digested the 2017 outlook, which anticipates an increased share of profits coming from asset sales and partnership income. Some analysts argue such "externalisation" revenue unduly flatters results, but AstraZeneca's finance head Marc Dunoyer said it was an integral part of the business model. Jefferies analysts said the 2017 EPS guidance implying a mid-point range of a 15 percent decline was some 3 percent below market expectations, although the revenue outlook was slightly better than anticipated. CRUCIAL RESULT Short-term financial results, however, matter less at the moment than the outcome of the MYSTIC clinical study testing a combination of immunotherapy drugs durvalumab and tremelimumab in previously untreated lung cancer patients. "Rarely has a single trial result been so crucial to a company the size of AstraZeneca," said Trinity Delta analyst Mick Cooper. Results are due around the middle of the year and Soriot stressed the trial had a range of outcomes offering different levels of commercial upside. Soriot believes the drug combination, along with recently approved cancer pills Tagrisso and Lynparza, will help transform AstraZeneca's business, keeping it on track for annual sales above $40 billion by 2023, from $23 billion in 2016. "It is an exciting time as we rapidly approach the inflection point for our anticipated return to long-term growth," he said. Still, the AstraZeneca's immunotherapy play remains a big uncertainty and recent developments have dented some investors' confidence. AstraZeneca last month tweaked the design of MYSTIC in a move seen as potentially signalling a more cautious approach, and two days later Bristol-Myers Squibb decided not to seek accelerated approval for its very similar two-drug combination. Merck & Co , meanwhile, surprised on the upside by securing a speedy review for a rival combination based on chemotherapy. The recent exit of several senior executives from AstraZeneca has added to shareholder nervousness, with its head of Europe operations and head of oncology both quitting in the past two months. (Editing by Alexander Smith and Susan Fenton)