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AstraZeneca - Oxford University collaboration update

Nicholas Hyett, Equity Analyst | 21 May 2020 | A A A
AstraZeneca - Oxford University collaboration update

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AstraZeneca plc Ordinary US$0.25

Sell: 8,627.00 | Buy: 8,638.00 | Change -47.00 (-0.54%)
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AstraZeneca provided an update on its collaboration with the University of Oxford. The agreement is to develop the University's coronavirus vaccine candidate AZD1222.

The group is working to "ensure broad and equitable supply of the vaccine throughout the world at no profit during the pandemic". All expenses to progress the vaccine are expected to be offset by funding by governments, and the group recognises that "the vaccine may not work".

Phase I/II trials are underway, with 320 people having been given the vaccine, and initial results are expected shortly. The group has received $1bn in support from the US Biomedical Advanced Research and Development Authority (BARDA). The new funding will support the development, production and delivery of the vaccine - starting with a 30,000 participant Phase III trial and a paediatric trial.

AstraZeneca has secured manufacturing capacity for 1 billion doses delivering first vaccines in September 2020 if trials are successful.

The shares were down 1% following the update.

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Our View

AstraZeneca's long awaited new drugs are out of the labs and into the hands of sales reps - who seem to be doing a sterling job. Demand for medication doesn't flag in the face of recessions or pandemics.

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 a raft of new cancer treatments scheduled for trial results or regulatory opinions over the coming year.

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. We've been particularly impressed with mature asthma treatment Pulmicort's growth in Emerging Markets.

Astra's collaboration with Japanese oncology specialist Daiichi Sankyo, also seems to be paying off. The high risk deal was pricey and focused on a drug, Enhertu, which hitherto hadn't been approved in any markets. Since the deal was signed we've seen positive trial results and the drugs been approved for certain breast cancers in the US. A great result from a drug which could easily have fallen at the final hurdle, but then that's an occupational hazard in the pharmaceutical industry.

That leads us nicely onto Astra's most recent roll of the dice - a tie up with Oxford University to develop a coronavirus vaccine. Before getting too excited it's worth noting that the vaccine might yet fail, and even if successful AstraZeneca has promised to distribute the vaccine at no profit while the pandemic lasts. However, if the team can crack a vaccine it's got long run potential as well as adding an expertise in vaccines that AstraZeneca has lacked in the past.

We also would also caution that despite the green shoots, organic free cash flow hasn't been strong enough to support the dividend in recent times. 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.

The need to deal with the sizeable debt pile means significant dividend growth could be some years away, and with a current yield of 2.5% that might be a bit of a disappointment. However, a price to earnings ratio of 24.5 times clearly suggests the market thinks the group has long run potential although there are of course no guarantees.

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First Quarter Results - 29 April 2020

AstraZeneca's first quarter revenue increased 17% at constant currency to $6.4bn, driven by a rise in product sales. Operating profit rose 16% to $1.2bn, also at constant currency. Core earnings per share rose 21% to $1.05 on the same basis

Financial guidance for 2020 is unchanged.

Astra thinks revenue growth benefited from a low-to-mid single-digit perecentage increase thanks to stockpiling, longer presecrpitions and patients being more vigilant about completing courses. However, the group thinks this effect will unwind as the year progresses.

Product sales revenue grew 17%, largely on the back of new medicines where sales grew 49% to $3.0bn and now make up 47% of product sales, up from 37% last year. Revenue grew in every therepy area. Oncology sales were up 34% to $2.5bn, New Cardiovascular (CV), Renal & Metabolism grew 8% to $1.1bn and Respiratory & Immunology grew 22% to $1.5bn. Collaberation revenue rose 70% to $43m.

Revenue also grew in every geographic region. Emerging market sales grew by 16% to $2.3bn, China by 17% to $1.4bn, the US by 16% to $2.1bn, Europe by 25% to $1.2bn and Japan by 8% to $553m.

Operating expenses grew 10% and are now equivalent to 66% of revenues (Q1 2019: 70%). Net debt increased from $11.9bn at the end of 2019 to $14.4bn on 31 March, mainly reflecting the dividend payment and low cash inflow from operations after taxes and interest payments.

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