Astrazenaca may have missed an opportunity

in Business

Here is the latest Business View column from James Penn of Thomas Miller Investment.

Will Astrazeneca, the drugs company, regret its rejection of a takeover bid by a rival three years ago?

That remains a relevant question for Astrazeneca shareholders as they digest the full year 2016 results.

Last week’s figures were in line with expectations, and were reasonably good given the headwinds the company has been facing. Over the past five years Astrazeneca has been through perhaps the biggest ’patent cliff’ any pharmaceutical company has faced, with the possible exception of Pfizer itself (which made the takeover offer).

Of $30bn revenues in 2011, $19bn came from from drugs where the patent was about to run out, meaning that so called ’generic’ companies (other low cost manufacturers) could step in, using the same chemical compound that Astra had discovered. Astra has done a good job in negotiating this patent cliff. Revenues declined 7% over the year (or -5% at constant exchange rates), but core Earnings Per Share was down only 5% as the decline was mitigated with cost cuts.

The picture was worse in the fourth quarter, with revenues down -13 per cent as sales of what used to be its biggest drug, Crestor, a treatment for statins, came off patent in the United States.

The dividend has been a major attraction through this period, with the company prioritising it. This has been maintained at $2.80 since 2012, giving the shares a yield of 5 per cent. The dividend is paid in US Dollars, so has had obvious attractions for Sterling based investors given the pound’s weakness. The company forecasts a further mid single digit revenue decline in 2017, and a 10-15 per cent decline in earnings.

But 2017 is supposed to represent a trough for the company, or an ’inflexion point’ in the words of CEO Pascal Soriot, with the company aiming to return to revenue growth in late 2017, or early 2018.

So will it be able to achieve this? Much now depends on what the company refers to as ’new Astrazeneca’. This comprises Emerging Markets, Japan, diabetes, new oncology, respiratory and Brilinta (a blood thinner). Together, ’new Astrazeneca’ represents roughly 60 per cent of the total company revenues.

The story told by ’new Astrazeneca’ is fairly positive. Revenues in these areas grew 6 per cent over the year and 6 per cent over the quarter.

The company has made great strides in Emerging Markets. Chinese revenues grew 10 per cent and the Astra has carved out a good position there (without any of the hiccups that its competitor, GlaxoSmithkline, succumbed to a few years ago). China is now its number 2 market. Most attention, and most risk, is now focused on the ’new oncology’ portfolio, where revenues stand at an annualised $1bn. Existing drugs include Iressa and Tagrisso, for lung cancer, and Lynparza, for ovarian cancer.

Astra has a lot at stake in what’s known as ’immunotherapy oncology’, or ’IO’, developing drugs that permit the body’s immune system to attack the cancer directly (in essence, by removing proteins that the cancer drugs envelop the white blood cells in). Its key drug is called Durvalumab, and there will be a lot of interest in how this performs in its ’Mystic’ trials in mid-year - particularly after an ’IO’ drug disappointment by another manufacturer recently.

The Pfizer bid in 2014 was pitched at £55, and Astra shares are currently sitting at £42, a long way below that level. When rejecting the bid three years ago, Pascal Soriot laid out projections for revenues to hit $40-41bn by 2023.

Revenues in 2016 stood at $23bn, and are due to fall further in 2017. If revenue growth doesn’t begin in a year’s time, that offer will begin to look like a missed opportunity.

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