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Changes in AstraZeneca’s Profitability in 2Q16

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AstraZeneca’s profitability

AstraZeneca (AZN) reported a decrease of 11% in revenues at ~$5.6 billion during 2Q16. It reported a net profit of $792 million in 2Q16, a decrease of 5% in net margins compared to 2Q15.

The company’s gross margin decreased to 81.4% for 2Q16 compared to 84% for 2Q15. This was mainly due to lower externalization revenues.

Its R&D (research and development) expenses increased to $1.5 billion in 2Q16, a 2% increase over 2Q15. This was due to an increase in spending on clinical trials and studies for drugs in the pipeline. It was also due to absorbing R&D costs for ZS Pharma and Acerta Pharma.

The company’s selling, general, and administrative expenses decreased by 5% to $3.1 billion in 2Q16.

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Financial guidance for 2016

AstraZeneca kept its financial guidance for 2016 unchanged in its 2Q16 results on July 28, 2016. It expects a low-to-mid-single-digit decline in worldwide revenues for 2016. The EPS (earnings per share) guidance range is also expected to decline in the low-to-mid-single-digits for 2016.

Externalization revenues are expected to be higher than 2015. The company is also reducing its selling, general, and administrative expenses for better profitability. Its R&D costs will be in line with 2015.

To divest the risk, investors can consider ETFs such as the iShares Core MSCI Europe (IEUR), which holds 0.9% of its total assets in AstraZeneca. It holds 1.2% each in GlaxoSmithKline (GSK) and Novo Nordisk (NVO) and 1.1% in Sanofi (SNY).

Investors can also consider ETFs such as the iShares Global Healthcare (IXJ), which holds ~2.0% of its total assets in AstraZeneca, or the First Trust Value Line Dividend ETF (FVD), which holds ~0.6% of its total assets in AstraZeneca.

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