Overview
AstraZeneca PLC (AZN) is a British pharmaceutical company. It was established in April 1999 after the merger of Astra AB and Zeneca PL and is headquartered in Cambridge, United Kingdom. The company is traded on London, New York and Stockholm stock exchanges, with the symbol AZN used in all the markets. The company has operations all over the world with business in over 100 countries, and its medicines are consumed by millions of patients across the globe. Its teams work alongside the world’s leading academic and biotech research institutions and have a clinical collaboration with Immunomedics. Pascal Soriot has been handed the responsibility of the Executive Director and the Chief Executive Officer of the company, he been a member of the Board and CEO since 2012.

Divisions
AstraZeneca is a global, science-led biopharmaceutical company, and the group does not have multiple operating segments and is engaged in a single business activity of biopharmaceuticals. However, it focuseson discovering, developing, manufacturing and commercialising prescription medicines. The company has three focus areas - Oncology, Cardiovascular & Metabolic Disease (CVMD) and Respiratory – and selectively pursue therapies in autoimmunity, neuroscience and infection. The company’s Oncology division aims at expanding the treatment options for tumours and haematological cancers, using four key scientific platforms: Immuno-oncology (IO), Tumour drivers and resistance mechanisms, DNA damage response and Antibody-drug conjugates (ADC). In the Cardiovascular & Metabolic Disease (CVMD) segment, the company is expanding its portfolio into the cardiovascular-renal area and has more than 25 potential medicines and medicine combinations in its pipeline.

Geographical Segments
The company’s geographic segments are grouped into the UK, Continental Europe, the Americas and Asia, Africa & Australasia. The Americas constitutes the most significant proportion of sales with 38.6 per cent, with China being the largest market, accounting for around 85 per cent of the geographical revenue in FY 2018. The company’s operations in emerging markets reported excellent results with revenue in China increasing by 28 per cent.

Key Statistics

 
Recent Developments
Despite an ongoing shareholder revolt over Pascal Soriot's, the head of AstraZeneca took home £11.4 million remuneration for the financial year 2018, an 9 per cent increase. This comes after the company had faced objections from the shareholders over management’s remuneration for two consecutive years. Moreover, on 1 March 2019, the company announced that European Medicines Agency formed the Committee for Medicinal Products for Human Use and adopted a favourable opinion of Lynparza (olaparib) tablets and has recommended their use for treatment of adult patients with germline BRCA1/2-mutations.
 
 Key Financial Metrics (Financial Year 2018, $m)
(
Source: Company Filings)


(Source: Company Filings)

Financial Highlights (FY2018, $m)
In the year 2018, product sales increased by 4 per cent to $21,049 million, reflecting the strong performance of new medicines, which generated an incremental sales of $2.8 billion at CER. However, total revenue decreased by 2 per cent to $22,090 million, primarily because of a 55 per cent decline in externalisation revenue, partly because of Initial Externalisation Revenue worth $997 million recognised in FY 2017. The reported gross margin decreased by 3 per cent to 77% in the year, core gross margin fell by 2% to 80%. The total reported operating expenses of $16,294 million remained stable; however, core expenses grew by 5 per cent to $14,248 million. Reported R&D Expenses increased by 3 per cent, reported SG&A Expenses declined by 2 per cent and other operating income and expense rose by 38 per cent to $2,527m, due to divestment transactions. For the year 2018, capital expenditure decreased to $1,043 million from $1,326 million in 2017. The reported EPS declined by 28 per cent over the last year to $1.70, and Core EPS dropped by 19 per cent to $3.46. Decreased EPS reflects a decline in the top-line numbers. A second interim dividend of $1.90 per share was declared by the company, increasing the dividend announced for 2018 to $2.8 per share. In 2018, Oncology sales increased by 50 per cent in 2018 to $6,028 million. Sales of Tagrisso increased by 95 per cent to $1,860 million, Imfinzi grew to $633 million from $19 million a year ago, and Lynparza grew to $647 million, increasing by 118 per cent. CVRM sales grew by 12 per cent over the year to $4,004 million. Farxiga grew to $1,391 million, representing a growth of 30%; sales for Bydureon was $584 million, an increase of 2%; and Brilinta grew by 22 per cent to $1,321 million. Respiratory sales grew by 4 per cent over the year to $4,911 million. Sales for Symbicort declined by 9% to $2,561 million; Pulmicort registered a growth of 9% to $1,286 million, and Fasenra reported sales of $297 million. The company in January 2019 announced organisational changes to improve scientific innovation and commercial success further.

Financial Ratios

(Source: Thomson Reuters)
 
 
Ratios Commentary
The company has consistently reported a higher profitability margin. However, the ratio slightly fell in FY 2018. The gross margin decreased by 2 percentage points, due to restructuring charges arising from biologic-medicine manufacturing facilities and the result of Lynparza collaboration with MSD.The company's liquidity margins are lower than its competitors. However, the ratios have gradually increased over the periods and are moving towards the industry median. The company is more leveraged than its peers. Moreover, the leverage ratios have gradually increased, indicating the company is taking on more leverage.Though the asset turnover ratio has remained consistent, it is below the industry median.
 
Valuation Methodology
Method 1: Price/Sales Multiple Approach (NTM)

 
To compare AstraZeneca Group with its peers, Price/Sales value has been used. The peers are Futura Medical PLC(NTM P/S was 6.9), Verona Pharma PLC (NTM P/S was 6.4),BTG PLC(NTM P/S was 5.2), Dechra Pharmaceuticals PLC(NTM P/S was 5.16),Merck & Co Inc(NTM P/S was 4.68) and ECO Animal Health Group PLC (NTM P/S was 3.72). The median of Price/Sales (NTM) of the company’s peers was 5.18x.

Method 2: Price/Book Multiple Approach (NTM) (Book Value Per Share (FY19E) approximately)


To compare AstraZeneca Group with its peers, Price/Book value has been used. The peers are Roche Holding AG(NTM P/B was 6,67), GlaxoSmithKline PLC (NTM P/B was 20.91),Sanofi SA(NTM P/B was 1.65), Novo Nordisk A/S(NTM P/B was 13.71),H Lundbeck A/S(NTM P/B was 3.98) and Merck & Co Inc (NTM P/B was 7.33). The mean of Price/Book (NTM) of the company’s peers was 9.04x.
 
* All forecasted figures and peers have been taken from Thomson Reuters.
* At the time of writing the report, the exchange rate (£/$) was 1.3143).
 
Share Price Commentary
 
Daily Chart as at Mar-07-19, before the market close (Source: Thomson Reuters)
 
On 7th March 2019, at the time of writing (before market close), AZN shares were trading at GBX 6,276, down by 0.47 per cent against its previous day closing price. Stock's 52 weeks High and Low is GBX 6,432.48/GBX 4,746.00. At the time of writing, the share was trading 1.97 per cent lower than its 52w High and 32.87 per cent higher than its 52w low. Stock’s average traded volume for 5 days was 1,799,130.60; 30 days - 2,004,712.07 and 90 days - 2,075,807.14. The average traded volume for 5 days was down by 10.25 per cent as compared to 30 days average traded volume. On the valuation front, the stock was trading at a trailing twelve months PE multiple of 24.1x. The company’s stock beta was 1.0, reflecting the same directional movement of stock with the index. The outstanding market capitalisation was around £79.95 billion and a dividend yield of 4.66 per cent.
 
Risks Assessment and Growth Prospects
The company has provided guidance for the year 2019: it expects a high single-digit percentage sales increase and core EPS of $3.50-$3.70 has been provided. The recent organisational changes are expected to improve speed and efficiency, and there are 149 projects in the pipeline, with eight new molecular entities in late-stage pipeline. This indicates excellent opportunities lies ahead for the company. The company’s focus on Emerging Markets, especially China and other leading markets, such as Russia and Brazil, is bearing fruits as the market grew the most in the financial year 2018. The company faces significant pressure from regulator changes with the threat of price controls increasing across all markets. The companies operate in over 100 countries, where the company is subject to political, socioeconomic and financial factors. A sustained global economic slowdown may further accentuate pressure from governments and regulators on prices, leading to a decline in some markets, which may result in a reduction of revenue, profits and cash flow. The uncertainty regarding Brexit is expected to increase volatility and may have an economic impact on some major markets.
 
Conclusion
Recent organisational changes coupled with the company’s focus on emerging markets makes the company an attractive stock to watch. The company is focusing on cost-cutting, which will improve the margins, and an excellent flow of revenue is expected from the drugs in the pipeline. Based on healthy fundamentals and the valuation done using the above two methods, we have given a BUY recommendation at the closing price of GBX 6,306, as at March-06-19 with double-digit upside potential based on 5.18x NTM Price/Sales on FY19E sales per share and 9.04x NTM Price/Book on FY19E Book value per share.
 

* The buy recommendation is valid for the current stock price as covered in the report as on (7th March 2019).

Note- GBp or GBX are interchangeably used for Pence Sterling. 

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