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AstraZeneca - guidance raised on strong growth

First half revenue rose 48% to $22.2bn, ignoring the impact of exchange rates. This reflected growth in all divisions apart from Other Medicines...

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First half revenue rose 48% to $22.2bn, ignoring the impact of exchange rates. This reflected growth in all divisions apart from Other Medicines.

Excluding the impact of the Alexion acquisition, exchange rates, and other one-off costs, operating profit was 71% higher at £1.4bn. This reflected higher-margin treatments making up a greater proportion of sales, which offset a 33% increase in operating costs.

A brighter outlook for Covid medicines means the group now expects full year revenue to increase by a low twenties percentage, up from previous guidance in the high teens. Core earnings per share guidance is unchanged for growth in by a mid-to-high twenties percentage.

The group announced a $0.93 interim dividend.

The shares fell 3.0% following the announcement.

View the latest AstraZeneca share price and how to deal

Our View

AstraZeneca's coronavirus vaccine has made it a household name worldwide, but the group's promise to sell the vaccine at cost ''during the pandemic'' means it's padded revenue but not profits. 2022 will pave a new road for the group's coronavirus medicines business-with new contracts that will allow the group to make money from its covid medicines being phased in.

This in addition to benefits from the Alexion acquisition have given management the confidence to increase payouts to shareholders, but remember all shareholder returns including dividends are variable and not guaranteed.

Alexion brings rare disease treatments into the AZN fold, a fundamentally attractive area of the pharmaceutical market with high margins, shorter development cycles, and longer periods of excl. The combination of Astra's massive distribution network and Alexion's specialized drugs should bring about a powerful windfall in the coming years.

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.

Breaking into this market didn't come cheap, though. The acquisition's sent net debt to uncomfortably high levels. But this pales in comparison to the potential growth the combination could offer. This is particularly true when it comes to higher risk emerging markets. Alexion's been primarily selling to the US and Europe, but under Astra's wing a greater proportion can be sold further afield. This is of course dependent on regulatory approval, but as AZN already has footholds in these markets it should make the process more efficient.

Integrating the acquisition and ramping up its benefits will be of utmost importance moving forward. Debt's sitting at 2.2 times last year's underlying cash profits, which isn't unmanageable. But with interest rates on the rise, we'd like to see that continue to fall. On top of cash returns to shareholders, the group also plans to increase research & development spend.

Luckily the windfall provided by covid treatment sales together with strong performances across the wider portfolio mean the group's confident those demands on cash won't eat into profits. However if things start to sour dividends will be first on the chopping block.

We think Astra is pretty well placed. A strong core business and the promise of rising coronavirus treatment profits are encouraging. But, with a valuation beyond the long-term average, there's potential for volatility if there are any hiccups.

AstraZeneca key facts

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.

First Half Results (currency neutral)

Oncology (34% of total) sales rose 22% to £7.5bn. This reflected a 14% increase in product sales driven by the launch of new medicines as well as increased patient access for Tagrisso, Imfinzi Lynparza and Calquence. Cancer diagnosis rates continued to recover following the pandemic, but have not reached pre-pandemic levels.

Biopharmaceuticals (47% of total) sales were up 31% to $10.4bn, led by strong growth in the largest segment, Cardiovascular, Renal and Metabolism drugs. Respiratory and Immunology revenue was up 3% and Vaccines and Immune Therapies more than doubled thanks to 42% growth in Covid vaccine Vaxzevria.

Rare Disease (16% of total) saw a 10% uplift in sales to £3.5bn. This included a one-off pricing adjustment, without which growth would have been a more modest 2%. Patients switching from Soliris to Ulomiris and Ulomiris' expansion into new markets was behind the growth.

Other medicine (4% of total) sales declined 12% to £862m as the main treatment, Nexium, was impacted by new buying patterns in China which lower per-unit prices.

Capital expenditure was $472m in the period, down from $508m. This is expected to rise for the full year due to increased investment and the Alexion acquisition.

Free cash flow was $4.0bn, up from $2.3bn, which fed into a slight reduction in net debt to $24.7bn.

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.

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 disclosure for more information.

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Written by
Laura Hoy
Laura Hoy
ESG Analyst

Laura is part of HL's ESG analysis team, working to offer research and analysis to help with sustainable decision making. She also works with other parts of the business to help integrate ESG.

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Article history
Published: 29th July 2022