AstraZeneca plc (AZN) Ordinary US$0.25
HL comment (30 April 2021)
AstraZeneca reported first quarter revenues of $7.3bn, up 11% at constant exchange rates. That was driven by strong growth in Oncology as well as $275m of coronavirus vaccine sales, with the group also benefitting from very strong sales growth in Emerging Markets. Excluding the vaccine, which is being sold at no profit, sales rose 7% to $7.0bn.
Core earnings per share for the quarter came in at $1.63, up 53% year-on-year.
The shares rose 2.6% 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's unlikely to move the dial financially in 2021. The real focus this year is the acquisition of Alexion, which if completed in the third quarter 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 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 proposed acquisition of Alexion could underpin future growth and cash flows. Assuming the deal avoids any last minute regulatory pitfalls, the future looks bright.
First Quarter Results (constant exchange rates)
Astra's Oncology portfolio saw sales rise 16% to $3.0bn, driven by strong growth in Lynparza and new launches Calquence and Enhertu.
New CVRM sales rose 15% to $1.3bn, with diabetes and heart treatment Farxiga reporting 50% year-on-year growth and accounting for nearly half of total sales in the division. That more than offset weakness in Brilinta which saw sales fall in China after the company decided not to compete in the new volume based procurement round.
Sales in Respiratory & Immunology fell 4% to $1.5bn, reflecting an ongoing decline in Symbicort and Pulmicort as the pandemic continued to affect hospital treatment of respiratory patients and generic rivals continued to grow.
The mature Other Medicines business saw sales fall 5% as growing sales of Nexium in emerging markets offset weakness elsewhere.
The group sold 68 million doses of its COVID-19 vaccine worldwide, with sales totalling $275m.
Total projects in the pipeline fell slightly to 166, including 22 medicines in Phase II trials or under regulatory review.
Capital expenditure rose 18.3% to $220m, as the group developed a new R&D centre in Cambridge. Total operating expenses rose 9%, with an 8% increase in Distribution expenses, 19% increase in R&D spend and 4% increase in sales, General & Administrative expenditure.
Free cash flow in the quarter came in at $1.7bn, up from a $47m outflow a year ago, reflecting higher profits and an improved working capital position. Net debt at the end of the quarter stood at $11.8bn compared to $14.5bn a year ago.
The group's 2021 guidance remains unchanged.
AstraZeneca key facts
- Price/Earnings ratio: 18.7
- 10 year average Price/Earnings ratio: 15.6
- Prospective dividend yield (next 12 months): 2.8%
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.
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.
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