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AstraZeneca - 2016 in line, 2017 a potentially defining year

Equity research team | 2 February 2017 | A A A
AstraZeneca - 2016 in line, 2017 a potentially defining year

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AstraZeneca plc Ordinary US$0.25

Sell: 10,790.00 | Buy: 10,792.00 | Change -20.00 (-0.19%)
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AstraZeneca saw total revenues for 2016 decline 5% at constant currency, with core earnings per share (EPS) falling by the same amount. The shares fell 0.7% following the announcement.

Our View

A number of AstraZeneca's key drugs have come off patent over recent years, allowing competing, generic drug versions in to the market. This has led to substantial pricing pressures and loss of sales. In May 2016, the US patent for Crestor (20% of group sales in FY15) expired, which has resulted in declining sales and profits for the group.

Other parts of AstraZeneca's drug portfolio are performing better. Key growth platforms, which include Brilinta (a cardiovascular drug), Diabetes, Respiratory, Emerging Markets and Japan, accounted for around 68% of total sales this year.

AstraZeneca recently added a sixth growth platform to the mix - new cancer drugs. Astra has a deep-rooted heritage in cancer medicine and is developing a number of next-generation cancer therapies which have the potential to redefine the way the disease is treated.

Of these, the MYSTIC immune-oncology, lung cancer trial is attracting the most investor attention. The read-out from the study is expected in mid-2017, and may well prove make or break for the share price in the near term.

Longer term, CEO Pascal Soriot is backing AstraZeneca's extensive drug pipeline to reignite growth. By 2023, he is targeting annual revenues in excess of $45 billion, up from $23bn this year, fuelled by the new blockbuster treatments he hopes to bring to market.

If Mr Soriot's projections are proved right, profits ought to be a lot higher in 8 years' time. If the pipeline fails to live up to expectations, investors will be buying into a declining drug portfolio with little or nothing to replace the lost sales. Analysts are forecasting a prospective yield of 5.2% for 2017 for those prepared to see if the long term strategy bears fruit.

Full year results - Constant Currency:

The 5% decline in revenues to $23bn was driven by an 8% fall in product sales, partially offset by a significant increase in externalisation revenue (revenue from drugs which Astra has sold but retains an interest in). Externalisation revenue accounted for 7% of total revenues.

Falling product sales primarily reflect the entry of generic competition to Crestor and Nexium in the US, which saw sales fall 57% and 39% respectively. Growth platforms now account for 63% of total revenues and grew 5% this year, led by strong performances from cardiovascular drug Brilinta (with sales up 39%) and a new oncology (including Tagrisso which now accounts for $423m of sales).

The group currently has 12 potential new medicines in the final stages of testing, across Oncology, Cardiovascular & Metabolic diseases and Respiratory. The Oncology pipeline, which attracted 40% of R&D spend this year, is said to be progressing ahead of company expectations, with particularly good progress in the Tagrisso and Immuno-Oncology programmes.

Core R&D costs grew 5% to $5.6bn, with Selling, General and Administrative (SG&A) costs falling 9% to $8.2bn. Total revenues are expected to decline by a low-to-mid single digit percentage next year, with EPS percentage declines in the low-to-mid-teens.

CEO Pascal Soriot commented;

"2017 has the potential to be a turning point for our company as we near the end of our patent-expiry period and bring new medicines to patients across the globe. We anticipate defining data, in particular from our outstanding pipeline of Immuno-Oncology and targeted treatments."

Unless otherwise stated, all estimated figures, including prospective dividend yields, are taken from a consensus of analyst forecasts compiled by Thomson Reuters. These estimates should not be taken as a reliable indicator of future performance.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.