AstraZeneca plc (AZN) Ordinary US$0.25
HL comment (29 April 2022)
First quarter revenue beat expectations and rose 60% to $11.4bn ignoring the impact of exchange rates. This was driven by growth in most categories, the contribution of Alexion's portfolio of products and Covid-vaccine contracts.
Cash profits (EBITDA) fell 16% to $2.2bn, lower than market expectations. This reflected costs associated with the Alexion acquisition, including a $1.2bn charge related to the revaluation of Alexion's inventory. A 36% increase in Research and development costs also contributed to the decline.
The group continues to expect full year revenue to rise in the high teens and earnings per share to increase by a mid-to-high twenties percentage.
Shares were broadly flat following the announcement.
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 vaccine sales waning and a monoclonal antibody treatment making up a larger proportion of sales. This has already begun, though the vaccine still makes up the bulk of its Covid-related sales.
This in addition to the potential growth runway coming from the Alexion acquisition have given management the confidence to increase shareholder returns, but remember dividends are variable and not guaranteed.
Alexion brings rare disease treatments into the AZN fold, a fundamentally attractive area of the pharmaceutical market. 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. Increased interest in the sector means the global rare disease market is forecasted to grow by a low double-digit percentage.
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 offers. This is particularly true when it comes to 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 shareholder returns, the group's plans to build a new research centre suggests cash could be stretched thin. Any missteps could see the dividend trimmed.
We think Astra is pretty well placed. A strong core business and the promise of rising coronavirus treatment profits are encouraging. However, with a valuation beyond the long-term average, there's potential for volatility if there are any hiccups.
AstraZeneca key facts
- Price/Earnings ratio: 18.7
- 10 year average Price/Earnings ratio: 16.8
- Prospective dividend yield (next 12 months): 2.2%
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 Quarter Results (constant currency)
Revenue rose across all geographic segments. The US remained the largest market, with sales up 79%. Emerging Markets is the second-largest and reported revenue growth of 32% despite a 6% decline in China. Europe and the Rest of World segments reported growth of 57% and 98% respectively.
BioPharmaceuticals (49% of total) saw a 53% uplift in sales to $5.6bn. This reflected double-digit growth in Cardiovascular, Renal and Metabolism drugs and a $1.5bn increase in Vaccines & Immune Therapies led by the Covid vaccine Vaxzevria. Respiratory and Immunology revenue rose 2%, but continued to experience pandemic-related headwinds.
Oncology sales (30% of total) rose 18% to $3.4bn, as new product launches and increased access to some drugs offset declines in legacy medicines and the adverse impact of seasonal changes to Medicare payments in the US.
Revenue in Rare Disease (15% of total) rose 7% to $1.7bn. This part of the business houses drugs brought into the portfolio as part of the Alexion acquisition.
Revenue in Other medicines (4% of total) fell 15% to $425m.
Free cash flow was $3.0bn, up from $1.7bn reflecting the impact of depreciation and favourable working capital movements. Net debt rose $895m to $25.2bn.
The group's also planning to build a new research and development centre in Massachusetts and increase the size of it's existing centre in Connecticut.
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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