AstraZeneca's first quarter revenue of $10.6bn was flat ignoring the effect of currency movements. Excluding the $1.5bn decline in COVID-19 medicine sales, revenue rose by 15%. The strongest drivers of this increase were sales of therapies for cancer and Cardiovascular, Renal and Metabolism (CVRM) conditions.
Underlying operating profit grew by 4% to $3.9bn. This reflected a shift in sales mix towards higher margin products, offset somewhat by higher research and development spend as well as other operating costs.
Free cash flow was broadly flat at $3.0bn, as was net debt which totalled $25.1bn.
AstraZeneca re-iterated full year guidance of low to mid-single digit revenue growth.
The shares were up 1.2% following the announcement.
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Our view
Having climbed the COVID-19 mountain, Astra has now hit the COVID-19 cliff with associated revenues expected to fall sharply this year. But Astra's used the windfall wisely and has ploughed nearly $20bn into R&D over the last two years. That doesn't always guarantee success in Pharma, but Astra's hit rate in the clinic is impressive.
Drug approvals in major markets reached record levels in 2022, giving CEO Pascal Soriot confidence that Astra is on a path to deliver at least 15 new medicines before the end of the decade. This could help underpin growth well into the future. But given the risks inherent in drug discovery, nothing's guaranteed.
AstraZeneca is seeing strong growth in its high value speciality medicines. Excluding COVID-19 vaccines and therapies, it now has 12 blockbuster medicines generating annual sales of at least $1bn each.
Cancer treatments (about a third of sales) are a cornerstone of Astra's offering and saw healthy double digit growth last year. Often these drugs can maintain high growth levels for many years, as patient access improves, approvals are gained in new markets, and clinical trials prove their efficacy in additional diseases.
Despite plummeting sales of COVID-19 medicines, Biopharmaceuticals remain the biggest contributor to revenue. With important clinical trials in progress the potential to build out this part of the business longer term remains significant.
We view Astra's acquisition of Alexion as a big jump towards becoming a leading player in the lucrative rare diseases market, with good progress being made in accessing previously unreached patients and markets. Astra is well placed to make further opportunistic acquisitions with two already under its belt in 2023.
Net debt's forecast by analysts to fall to from around 2x to under 1.5x cash profits this year. But with debt levels in the first quarter higher than at the end of 2022, there's plenty to do to meet those forecasts. With interest rates on the rise, we'd like to see debt levels come down. Especially given other demands on cash resources. The group's likely to put more money into research and development, as recent clinical results give it the confidence to launch additional late-stage clinical trials. Continuing success in drug approvals will be needed in order to offset the potential loss of revenue from patent expirations over the coming years.
For now however, Astra is generating strong cash flows from its existing portfolio of marketed medicines. This also supports the modest dividend yield, though nothing is guaranteed.
The valuation's not in bargain territory, broadly in line with the long-term average and relatively high compared to its peers. With that in mind we feel the valuation is likely to be sensitive to any further disappointments either in earnings, or in the clinic.
Environmental, social and governance (ESG) risk
The pharmaceuticals sector is relatively high-risk in terms of ESG. Product governance, particularly with safety and marketing, and affordable access to treatment are the key risk drivers. Labour relations, business ethics and bribery and corruption are also contributors to ESG risk.
According to Sustainalytics, AstraZeneca's overall management of material ESG issues is strong. The executive compensation plan includes a target to eliminate greenhouse gas emissions by 2025, and the sustainability strategy is overseen by upper management. AstraZeneca has implemented a robust programme to monitor patient safety trends and ensure the quality and efficacy of its products. Access to healthcare is a key strategic priority. The company has a strong human capital development programme with initiatives to recruit and retain highly specialised employees, highly pertinent following the acquisition of Alexion which adds 2,500 headcount.
ESG data sourced from Sustainalytics
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AstraZeneca key facts
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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. 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.
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