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AstraZeneca - Sales soar as new drugs thrive

Nicholas Hyett | 25 July 2019 | A A A
AstraZeneca - Sales soar as new drugs thrive

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AstraZeneca plc Ordinary US$0.25

Sell: 8,038.00 | Buy: 8,040.00 | Change 0.00 (0.00%)
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Second quarter revenue rose 18% to $5.8bn, a significant step up on the first quarter. However, increased operating costs associated with growing sales meant core operating profit growth was slower at 8%. Both numbers were comfortably ahead of expectations.

The strong performance to date has led the company to upgrade full year sales guidance, which is now expected to see a high single-digit percentage increase.

The interim dividend is unchanged at $0.90 per share.

The shares rose 5.7% in early trading.

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Our View

AstraZeneca has turned a corner. The long awaited new drugs are out of the labs and into the hands of sales reps - who seem to be doing a sterling job.

The group's portfolio of new Oncology drugs has been a particular success story, and it's a trend that looks set to continue with 16 new cancer treatments scheduled for trial results or regulatory opinions next half. 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, while boosting sales of more mature treatments.

However, Astra clearly felt the pipeline needed another shot in the arm, hence the agreement to buy oncology specialist Daiichi Sankyo at the end of last year. 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. While that's clearly unsustainable in the long run, 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 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 3.5%, investors are getting jam today and hopefully more tomorrow.

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Second Quarter Results

Every region saw sales grow during the quarter, with particularly strong result from the Emerging Markets and Rest of World segments.

Product sales growth was driven by a 57% increase in sales of Oncology treatments, with total sales reaching $2.2bn. Recently launched Tagrisso and Lynparza both delivered growth of over 90% - accounting for a combined $1.1bn of sales.

The Biopharmaceuticals business, which includes cardiovascular and respiratory treatments, saw sales rise 10% to $2.3bn. Good performance by cardiovascular treatments Farxiga and Brillinta helped offset weakness in more established respiratory treatment Symbicourt.

The group's Other Medicines brought in sales of $1.2bn, down 6% year-on-year. That was largely down to the continued decline of stomach acid treatment Nexium which saw sales fall 7% to $393m.

Core Selling, General & Administrative (SG&A) costs increased 8% as the group invested to support growth in China and in new medicines. R&D cost rose just 1% with distribution costs rose 3%.

Net debt increased slightly over the half to $13.1bn, compared to $13bn at the end of last year. However, that was largely down to changes in accounting rules.

Four new drugs received regulatory approvals during the quarter, with results from 11 stage III trials announced. Management expect trial results or regulatory decision relating to 24 drugs in the second half of the year.

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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.