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AstraZeneca - Revenues still falling, profit guidance disappoints

George Salmon | 2 February 2018 | A A A
AstraZeneca - Revenues still falling, profit guidance disappoints

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AstraZeneca plc Ordinary US$0.25

Sell: 8,038.00 | Buy: 8,040.00 | Change -78.00 (-0.96%)
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AstraZeneca saw full year revenues fall 2% to $22.5bn, with core operating profits broadly flat at $6.9bn and core earnings per share down 2% to $4.28. The final dividend remains unchanged at $1.90.

The shares fell 1.1% in early trading.

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Our View

After losing patent protection on some key drugs a few years ago, Astra finally looks like it's turning a corner.

Progress in Astra's growth platforms has been encouraging, with recently approved oncology drugs a particular stand out. The decision to expand the geographic footprint into Emerging Markets and Japan should mean Astra can make the most of new drugs as and when they arrive.

However, despite those green shoots, the group continues to lean heavily on externalisations, essentially selling stakes in some of its smaller drugs for cash up front and small ongoing interest. At the moment that's bridging the gap between 'organic' cash flows and the demands of the dividend. It can only continue for so long though. Astra needs a shot in the arm from new drugs emerging from the lab.

Fortunately recent results have been promising, with regulatory approvals starting to rack up in oncology and respiratory.

The group has 23 treatments in late stage trials and 132 projects in the clinical pipeline. That bodes well. But until a drug passes the final regulatory hurdles there's no guarantee all those millions spent on development will yield any results at all.

CEO Pascal Soriot has been targeting annual revenues in excess of $45 billion by 2023, compared to $22.5bn in 2016. There's no update on that ambition today, but growth of that magnitude requires the pipeline to deliver some stellar results.

Analysts are forecasting a prospective yield of 4% for those prepared to see if the men and women in white coats can deliver results for those wearing suits.

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Full Year Results - Constant Exchange Rates

The 2% fall in full year revenues reflects a 5% decline in product sales, partially offset by a 38% increase in revenues from externalisations - where the group sells rights to smaller drugs for cash up front and a small ongoing interest. Product sales accounted for 90% of total group sales for the year.

However, the final quarter saw a reversal in this trend, with total revenues rising 2% to $5.8bn thanks to a 3% increase in product sales, partially offset by a 12% decline in externalisations.

AstraZeneca's growth platforms grew 6% for the year and 12% in the fourth quarter, and now account for 68% of full year total revenues. New Oncology was the start performer within growth platforms, with annual sales of $1.3bn up 98% thanks to strong performance from Tagrisso and first sales of Imfinzi.

Core research & development costs fell 3% in the year to $5.4bn, with Selling, General & Administrative costs down 3% to $7.9bn.

Net debt at the end of the full year was $12.7bn, a 19% increase in the year.

Products sales are expected to increase by low single-digit percentage in 2018, with core earnings per share of $3.30-$3.50.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not 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.