AstraZeneca reported full year revenue of $26.6bn, up 10% at constant exchange rates. That reflects very strong growth in the group's new oncology treatments. Underlying earnings per share rose 18% to $4.02.
The group expects total revenue to rise by a low teens percentage next year, with core earnings per share to rise to between $4.75 and $5.00. This does not include any gain on the sale of COVID-19 vaccines, or the effect of the planned Alexion deal.
A final dividend of $1.90 per share means the overall full year dividend remains unchanged at $2.80 per share.
The deal is subject to approval by regulators and shareholders.
The shares rose 1.3% in early trading.
Astra's coronavirus vaccine has made it a household name worldwide. However, having promised not to profit from the vaccine ''during the pandemic'' it is unlikely to move the dial financially in 2021. Instead the real focus this year is the acquisition of Alexion, which if completed in the third quarter of this year as expected, will be the pharmaceutical giant's largest ever deal.
As we see it, the rationale for the deal rests on three key pillars. First, that rare diseases are a fundamentally attractive area of the pharmaceutical market. Second, that increased scale will allow the combined company to deliver cost savings and operate more efficiently. And third that Astra's powerful global distribution network can boost sales of Alexion's treatments quickly.
Rare diseases are, by definition, uncommon. In the past spending millions, perhaps billions, on researching a drug to treat a few tens of thousands of patients worldwide didn't make financial sense. Instead attention focused on treatments for common diseases, like asthma, with patients stretching into the tens of millions. As a result, only around 5% of designated rare diseases have approved treatments.
More recently that attitude has shifted. While major diseases may have large markets, they also attract lots of competition. That means individual drugs companies can end up with a relatively small slice of a large pie. Competition in rare diseases is far lower - a drug company which develops a treatment for a previously unaddressed illness will likely end up serving the entire market and can probably attach a hefty price tag to boot. It's also unlikely a competitor will develop a more effective alternative, since competition is so much lower. Increased interest in the sector means the global rare disease market is forecasted to grow by a low double-digit percentage.
Cost savings are a standard feature of any major merger, and this one is no exception. However, given the price tag and the premium Astra is paying, $500m isn't all that substantial. Instead we think the opportunity to boost Alexion's sales through Astra's distribution network is far more important. Markets outside Europe and the US account for just 20.5% of sales at Alexion, compared to 33.6% at Astra. With Astra's recent growth driven by expansion in emerging markets there's clear opportunity to cross-sell new products in those markets.
Despite adding $17.5bn to Astra's debt pile, the deal is set to strengthen Astra's cash generation. Initially the company has said it will use that to reduce debt (no bad thing in the circumstances). However, management has hinted that over time it could also support an increase in the dividend. Given Astra's had to draw on debt to pay the dividend in recent years, that would be a major event.
The market was initially sceptical about the deal. Cash flow is finally closing the gap with the dividend, and debt reduction looked set to be the order of the day. A big deal, at a massive premium, involving large quantities of debt just wasn't on the to do list. The fact that it adds another ''therapy area'' to Astra's relatively focused business model also muddies a previously pretty streamlined investment case.
However, we think investors should give Astra the benefit of the doubt for now.
For starters the deal isn't quite as expensive as it looks at first glance. Over half of the price is being paid in shares. Prior to the deal's announcement Astra shares were trading a PE ratio of 21.9, whereas Alexion shares traded on 9.4. Astra is buying lowly valued Alexion stock with highly valued stock of its own - the very definition of the stock market motto ''buy low, sell high''.
The core Astra business remains attractive in our view. While the increased level of debt isn't ideal, if management can use the extra cash flow from Alexion to boost the balance sheet over the next few years, that would significantly reduce the risk in the business. Dividend growth would be the icing on the cake - although it's far from guaranteed.
Just as a final point, investors should bear in mind that the deal isn't yet signed and sealed. Regulatory approvals and shareholders approvals might be a formality, but they've tripped deals up in the past. There's also the risk that a rival bidder appears out of the woodwork - given Alexion's relatively modest PE ratio that shouldn't be ruled out.
AstraZeneca key facts
- Price/Earnings ratio: 19.2
- 10 year average Price/Earnings ratio: 15.4
- Prospective dividend yield (next 12 months): 2.9%
All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.
Full Year Results (constant exchange rates)
Astra's Oncology drugs saw a 24% increase in sales to $11.5bn. That reflects very strong growth from recently launched drugs such as Tagrisso (up 36% to $4.3bn) Lynparza (up 24% to $2.2bn) and Imfinzi (up 39% to $2.0bn).
Sales across the BioPharma business rose 4% to $10.1bn, with growth concentrated in new Cardiovascular and Respiratory Medicines (new CVRM) where sales rose 9% thanks to good results from drugs like Farxiga and Brilinta up 30% and 2% respectively). More mature Respiratory & Immunology treatments saw sales remain flat year-on-year, as declines in Pulmicort sales offset progress elsewhere.
Other medicines, which includes Astra's decline drugs portfolio, saw sales fall 2% to $5.1bn.
From next quarter sales of AstraZeneca's Coronavirus vaccine will be reported separately.
On a regional basis the US and Europe were Astra's fastest growing markets, with product sales up 12% and 15% respectively. However, growth of 10% in Emerging Markets means it remains AstraZeneca's single largest market - at $8.7bn. Growth in the Rest of World region came in at 6% year-on-year.
Free cash flow in the year came in at $3.8bn, up from $2.0bn in 2019, reflecting the higher level of profit. That compares to a dividend during the year of $3.6bn, although expenses associated with historic acquisitions mean net debt still rose $206m to $12.1bn.
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