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AstraZeneca - looking healthy going into the Alexion deal

Nicholas Hyett, Equity Analyst | 29 July 2021 | A A A
AstraZeneca - looking healthy going into the Alexion deal

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AstraZeneca plc Ordinary US$0.25

Sell: 8,263.00 | Buy: 8,265.00 | Change 74.00 (0.90%)
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AstraZeneca reported first half sales of $15.5bn, up 18% at constant exchange rates (CER), or 9% excluding COVID-19 vaccine sales to $14.4bn. That reflects growth across both the Oncology and Biopharmaceutical portfolios.

Core earnings per share rose 27% at CER to $2.53, as Distribution and Sales, General & Administrative expense increases lagged revenue growth.

The board announced an interim dividend of $0.90 per share, unchanged year-on-year.

The Alexion deal completed on the 21 July and is not reflected in these numbers.

Astra shares were broadly flat following the announcement.

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Our View

Half year results show Astra's core business in rude health.

New cancer drugs are selling well and recent blockbusters continue to gather sales as they're approved for new variants and in new markets. Meanwhile a focus on Emerging Market sales is proving a shot in the arm for mature drugs like Nexium, Pulmicort and Symbicort -boosting sales that are declining in more development markets. With the pipeline rich in new treatments in the final stage of testing the future looks bright.

It's worth noting that while Astra's coronavirus vaccine has made it a household name worldwide the group promised not to profit from the vaccine ''during the pandemic''. As a result, it's proving more of a burden than a boost financially at the moment - with R&D and distribution costs hitting reported margins. That may change in 2022, but we think it's unlikely to move the dial financially in 2021.

Instead the real focus this year is the acquisition of Alexion, which completed in mid-July and is 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 in planned savings isn't all that substantial. 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.

Overall we think Astra is pretty well placed. A strong core business has weathered the crisis well, while the acquisition of Alexion could underpin future growth and cash flows. The future looks bright.

AstraZeneca key facts

  • Price/Earnings ratio: 19.0
  • 10 year average Price/Earnings ratio: 16.0
  • Prospective dividend yield (next 12 months): 2.5%

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.

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Half Year Results (CER)

Astra's Oncology business reported first half sales of $6.4bn, up 15% at constant exchange rates as Tagrisso, Infimzi, and Lynparza all continued to deliver strong growth. Recently launched leukaemia treatment Calquence and breast cancer treatment Enhertu delivered positive results - generating total sales of $579m.

In New CVRM (cardiovascular, renal and metabolism) sales rose 16% to $2.7bn. That was driven by diabetes and kidney disease treatment Farxiga, where sales rose 53% to $1.4bn, and new drugs.

Respiratory & Immunology sales rose 6% to $3.0bn, with growth in Fasnera offsetting declines in Symbicort and Pulmicort - although declines in the latter two moderated in the second quarter.

The group's portfolio of other medicines saw sales fall 14% in the half to $1.0bn, despite Nexium sales (which accounted for 74% of sales in the division) remaining flat year-on-year.

Total operating costs in the half came in at $9.8bn, up 12% on a year ago. That was largely driven by a 22% increase in Research & Development expenditure as Astra continued to invest in Coronavirus vaccines and new medicines to prevent and treat COVID-19, as well as several late stage oncology trials.

The group currently has 22 drugs in late stage phase II trials or under review, with a total of 143 total projects in clinical development.

Free cash flow in the quarter came in at $2.3bn, compared to $809m a year before, reflecting working capital improvements and higher profits. While that didn't quite cover the dividend for the half, disposals meant net debt fell from $12.1bn at the start of the year to $11.7bn.

Following the completion of the Alexion acquisition the group has upgraded guidance for the full year. It now expected revenue to increase by a low-twenties percentage, with Core earnings per share to be somewhere between $5.05 and $5.40.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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.