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AstraZeneca - Bumper fourth quarter boosts full sales

Nicholas Hyett | 14 February 2019 | A A A
AstraZeneca - Bumper fourth quarter boosts full sales

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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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Full year product sales rose 4% at constant exchange rates (CER) to $21bn, although less income from disposals meant total revenue fell 2%. Astra enjoyed a bumper fourth quarter, with product sales up 8% thanks to a strong oncology performance.

2018's core operating profit was 17% lower year-on-year at $5.7bn. That reflects a slight decline in margins and lower externalisation revenues.

The full year dividend remains unchanged at $2.80.

The shares rose 2.7% in early trading.

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Our View

Astra's revenue and profits have been trending down since it lost patent protection on key drugs a few years ago. But we're approaching an important turning point.

The much-vaunted pipeline is starting to deliver, and analysts expect revenue growth to turn positive over the next 12 months.

Recently approved oncology drugs are a particular stand out and the decision to expand the geographic footprint is bearing fruit too. An increased presence in Emerging Markets and Japan means Astra's been able to make the most of new drugs, as and when they arrive, and has also helped boost sales of more mature treatments.

Despite the green shoots, organic free cash flows still aren't strong enough to support the dividend. That means Astra will be relying on debt and externalisation deals, where it sells stakes in some of its smaller drugs for cash up front and is left with just a small ongoing interest, to fund the dividend for another year at least.

That's clearly unsustainable in the long run. But if all goes to plan, the decision to hold the dividend steady during the lean times will be more than vindicated.

Not so long ago CEO Pascal Soriot was targeting annual revenues in excess of $45bn by 2023, compared to $22.1bn in 2018. That's a big ask, even with 131 projects in the labs.

To date the pipeline has generally delivered well, albeit with a few notable exceptions. But until a drug passes the final regulatory hurdles there's no guarantee the millions spent on development will be worth anything at all.

Even once we're over the hump, the need to deal with the mounting debt pile means significant dividend growth could be years away. But with analysts forecasting a prospective yield of 3.7% next year, investors are at least being paid to wait as the baton passes from labs to sales reps.

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Full Year Results (constant exchange rates)

Full year product sales were driven by a 49% increase in Oncology sales which now stand at $6bn. That was largely thanks to the success of lung cancer treatment Tagrisso, with other newly launched drugs including Imfinzi and Lyparza also delivering strong growth.

Astra's other two growth areas, New CVRM and Respiratory, saw sales rise 12% and 3% to $4bn and $4.9bn respectively.

The mature Other portfolio saw sales fall 23%. That included a 14% fall in sales of gastro-intestinal drug Nexium, AstraZeneca's third largest drug by sales.

Core operating expenses increased 4% to $14.2bn. That reflects a 9% increase in core SG&A (Sales General & Administrative) spending to support new drug launches and expansion into China, where sales grew by 25% in the year.

The group expects 29 major regulatory or trial deadlines in 2019, with over half coming from the growing oncology portfolio.

Core earnings per share (eps) were 19% lower than last year at $3.46, reflecting the lower externalisation revenue and decline in gross margin.

Net debt during the year increased 2.6% to $13bn.

Astra now expects 2019 to see high single-digit growth in product sales and report core eps of between $3.50 and $3.70.

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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.