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AstraZeneca - Product sales mean revenues growing again

George Salmon | 26 April 2019 | A A A
AstraZeneca - Product sales mean revenues growing again

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AstraZeneca plc Ordinary US$0.25

Sell: 10,798.00 | Buy: 10,802.00 | Change -254.00 (-2.30%)
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Product sales rose 14% to $5.5bn, partially offset by lower collaboration (formerly externalisation) revenues which stood at just $26m. Core operating profits rose 96% to $1.7bn, as costs increased only marginally. Both sales and profits were comfortably ahead of market expectations.

The shares rose 1.1% in early trading.

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Our View

Pascal Soriot will be feeling some vindication after these numbers, having promised investors the pipeline would deliver when fending off Pfizer's bid back in 2014. With product sales showing signs of long term growth and revenue turning positive, the days of keeping the dividend ticking over with asset sales look at an end.

Recently approved oncology drugs are a particular success story, 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.

However, Astra clearly felt the pipeline needed another shot in the arm, hence the Daiichi Sankyo deal. It's a high risk bet. The drug in question hasn't been approved in any markets, so there's always the risk it falls at the final hurdle and ends up being worth nothing at all. But then that's a fundamental part of the pharmaceutical industry.

Despite the green shoots, organic free cash flow hasn't been strong enough to support the dividend. That means Astra will be relying on debt to fund the dividend for a little bit longer at least.

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

It's worth bearing in mind though that even once we're over the hump, the need to deal with the mounting debt pile means significant dividend growth could be years away. Fortunately, with analysts forecasting a prospective yield of 3.7%, investors are at least being paid to wait as the baton passes from labs to sales reps.

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First Quarter Results

Astra's strong product sales were driven by new medicines, which saw sales grow 83%, with particularly good results from oncology. Tagrisso saw sales rise 92% year-on-year, to $630m and is now Astra's highest revenue drug, accounting for 12% of sales.

Collaboration revenues fell 86% compared to the same period last year, to $26m. That reflects the lack of any sales revenues in the quarter, with all collaboration revenues generated from ongoing sources like Royalties.

Emerging markets remain an area of particular strength, with sales up 22% this quarter to $2bn. Although new medicines are enjoying success in these regions, more established names such as Nexium and Symbicort, are delivering good results.

Operating expenses grew 5% and are now equivalent to 70% of revenues (Q118: 74%).

The pipeline remains robust and active, with major data readouts and regulatory submissions across oncology, cardiovascular and respiratory treatment areas in the remainder of the year. The group currently has 139 projects across the clinical pipeline.

Net debt increased 5.5% to $16.3bn, although an upcoming share placing is expected to help reduce debt in the near future.

Guidance for the full year remains unchanged.

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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.