AstraZeneca PLC (LON: AZN) is a British-based international, science-led biopharmaceutical company, which focuses on the development, commercialisation, and discovery of prescription medicines. For the treatment of diseases, the company’s main three therapy areas are Oncology, Cardiovascular, Renal and Metabolism, and Respiratory. The company’s geographic segments are grouped into the Africa, Americas, Asia-Pacific, Europe, and the Middle East and North Africa. It was established in 6^th April 1999 after the merger of Astra AB and Zeneca Group PLC and is headquartered in Cambridge, United Kingdom. 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. The company is traded on London, New York and Stockholm stock exchanges, with the symbol AZN used in all the markets. As per the latest quarterly updates, the company has 9 new molecular entities in the late-stage pipeline, 164 projects in the pipeline, and one new molecular entity approval.

On 14^th February 2020, the company will announce its full-year 2019 results.

Management

Leif Johansson is the Non-Executive Chairman of the group’s Board since June 2012. Pascal Soriot holds the responsibilities of Executive Director and the Chief Executive Officer. Marc Dunoyer is the current Executive Director and Chief Financial Officer (CFO) of the group.

Key Statistics



Top Shareholders
 
 

Latest Developments

On 13^th January 2020, the company and MSD Inc announced that supplemental New Drug Application for Lynparza in combination with bevacizumab has been received and approved Priority Review in the United States for the first-line maintenance treatment.

On 13^th January 2020,the company released that it had agreed to shut Phase III STRENGTH trial for Epanova.

On 6th January 2020, AstraZeneca announced the acceptance of sNDA (supplemental New Drug Application) by the US FDA (Food and Drug Administration) and granted Priority Review for dapagliflozin (Farxiga).

On 30^th December 2019, the company announced that Lynparza, is a first-in-class PARP inhibitor, had approved a first-line maintenance treatment of germline BRCA-mutated (gBRCAm) metastatic pancreatic cancer in the United States.

For the maintenance treatment of COPD (chronic obstructive pulmonary disease (COPD), the company announced on 23^rd December 2019 that budesonide/glycopyrronium/formoterol fumarate has been approved in China.

For the treatment of adult patients, Daiichi Sankyo Company, Limited and AstraZeneca announced on 23^rd December 2019, that the US FDA had approved Enhertu with metastatic or unresectable HER2-positive breast cancer.

On 16^th December 2019,the company had accomplished a contract to divest the group’s commercial rights to Seroquel XR and Seroquel in Russia and Europe to Cheplapharm Arzneimittel GmbH.

Business Divisions

The group is engaged in a single business activity of biopharmaceuticals. However, it focuses on 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. In Respiratory segment, the company is entering an era of unprecedented potential to provide scientific breakthroughs within chronic obstructive pulmonary disease (COPD), asthma, chronic cough, and idiopathic pulmonary fibrosis (IPF).


(Source: Q3 Presentation, Company Website)

As seen in the above image, the company delivered double-digit growth across all therapy areas and in the emerging market also. In the third quarter of 2019, the sales growth by therapy area: Oncology was up by 46% (up 48% at CER) to $2,334 million, New CVRM increased by 8% (up 11% at CER) to $1,113 million and Respiratory surged by 15% (up 18% at CER) to $1,319 million. For the third quarter of 2019, the sales growth by region: total Emerging Markets sales increased by 25% (up 29% at CER) to $2,123 million, with China sales surged by 35% (up 40% at CER) to $1,283 million. The United States sales rose by 17% to $2,025 million; Europe sales was up by 1% (up 4% at CER) to $1,139 million; Japan sales surged by 31% (up 27% at CER) to $657 million.

Financial Highlights – Q3 and 9M Financial Year 2019 (30th September 2019, USD, million)


(Source: Q3 Results, Company Website)

In the first nine months of 2019, the product sales increased by 13% (17% at CER) to $17,315 million, while the product sales also increased by 16% (18% at CER) to $6,132 million in Q3 FY19. The third quarter again reported decent sales performance across all regions and therapy areas. In 9M FY19, the reported gross margin surged by 1% to 80%, partially reflecting the mix of sales. The core gross profit margin for the first nine months of 2019 surged by 1% to 81%. For 9M FY19, the reported operating expense rose by 11% (15% at CER) to $12,871 million and reflected 73 per cent of Total Revenue. The core operating expense surged by 3% (6% at CER) to $10,537 million and showed 59 per cent of Total Revenue, driven by a substantial increase in operating leverage. The company’s reported R&D Expense was up by 1% (5% at CER) to $3,968 million in 9M FY19. Core R&D Expense for the first nine months of 2019 surged by 1 per cent (4 per cent at CER) to $3,826 million. The reported SG&A Expense for 9M FY19 rose by 16% (20% at CER) to $8,656m, driven by an increase in revaluation movements and legal provisions on acquisition-related liabilities. Core SG&A Expense was up by 4% (8% at CER) in 9M FY19 to $6,464 million, mainly reflecting progress in China and also continuing further support for new medicines. The reported Tax Rate in the first nine months of 2019 stood at 27% versus the same period in 2018 of 18%. The Core Tax Rate for the first nine months of 2019 stood at 22%. The tax rates in the first nine months of 2019 reflected the impact of collaboration and divestment activity and the geographical mix of profits. The core EPS surged by 39% (38% at CER) to $2.61, while in the third quarter of 2019, the core EPS surged by 40% (36% at CER) to $0.99. Cash and cash equivalents at the end of the period were $3,779 million, an increase from the corresponding period of the last year.

Financial Ratios


Source: Thomson Reuters

The company has consistently reported higher profitability margins in the current period. All the reported profitability metrics – EBITDA, Operating Margin, Net Margin and ROE, accelerated in the current period as compared to the last quarter. The company's liquidity margins were lower than its competitors. However, the ratios have gradually increased over the period and are moving towards the industry median. On leverage front, the debt-equity ratio of the group stood at 1.49x, which was higher as compared to the industry median of 0.64x, reflecting that the company is more leveraged as compared to its peers.
 
Share Price Performance


Daily Chart as of January 16th, 2020, before the market close (Source: Thomson Reuters)

AstraZeneca PLC shares were trading at GBX 7,760 at the time of writing before the market close (at 11:00 AM GMT) on 16th January 2020 and were down by 0.97% versus the previous day closing price. Stock 52 weeks High and Low are GBX 8,227.88/GBX 5,312. Stock’s average traded volume for 5 days was 1,065,965.40; 30 days – 1,401,401.20 and 90 days – 1,625,637.92. The traded (average) volume for five days was down by 23.94 per cent versus 30 days traded (average) volume. The group’s stock is reflecting significantly lower volatility as against the benchmark index based on the company’s beta of 0.78. The outstanding market capitalisation was around £102.67 billion, with a dividend yield of 2.84 per cent. The shares of the company have delivered a positive return of 1.03 per cent in the last week and 4.16 per cent in last one month.

Valuation Methodology

Method 1: EV to Sales Approach (NTM)



To compare AstraZeneca PLC with its peers, EV/Sales multiple has been used. The peers are Novartis AG (NTM EV/Sales was 6.23), Roche Holding AG (NTM EV/Sales was 5.50), Novo Nordisk A/S (NTM EV/Sales was 6.95) and Bristol-Myers Squibb Co (NTM EV/Sales was 4.52). The Average of EV/Sales (NTM) of the company’s peers was 6x (approx.).

Method 2: Price/Earnings Multiple Approach (NTM) 
 


To compare AstraZeneca PLC with its peers, Price/Earnings multiple has been used. The peers are Alcon AG (NTM Price/Earnings was 28.51), Grifols SA (NTM Price/Earnings was 25.82), Dechra Pharmaceuticals PLC (NTM Price/Earnings was 27.49), Orion Corp (finland) (NTM Price/Earnings was 22.48), and Virbac SA (NTM Price/Earnings was 24.58). The median of Price/Earnings (NTM) of the company’s peers was 25.77x (approx.).

Growth Prospects and Risk Assessments

The company has provided guidance for the year 2019 and expects a low to mid-teens percentage sales increase and core EPS of $3.50-$3.70.The recent organisational changes are expected to improve speed and efficiency, and there are 164 projects in the pipeline, with 9 new molecular entities in the late-stage pipeline. This indicates excellent opportunities lies ahead for the company. The company’s focus is on Emerging Markets, especially China and other leading markets, such as Russia and Brazil are bearing fruits as the market grew the most in the financial year 2018. The company faces significant pressure from regulatory changes with the threat of price controls increasing across all markets. A 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

In the third quarter of 2019, the revenue has increased by 18 per cent in constant currency to $6.1 billion, beating consensus expectations of $5.8 billion. In the third quarter of 2019, the group has demonstrated decent operating-margin improvement, as its core operating profit also surged during the current year. In the financial year 2019, the cash performance is anticipated to consist of numerous payments relating to prior business development transactions and most of the value of these payments in the current year was resolved in the H1 FY2019. Capital expenditure is projected to be roughly stable and restructuring expenses will decrease against the previous year. Product sales are now anticipated to surge by a low to mid-teens percentage. The company reiterates its Core EPS guidance will be in the range of $3.50-$3.70 over the full year. The core tax rate will be in the array of 20% - 22% in FY19.

Over the last four years, the net income after tax of the company has increased at a CAGR of 13.51 per cent while operating income has grown at a CAGR of 12.2 per cent, indicating strong growth.

Based on the decent prospects and support from the valuation as done using the above two methods, we have given a “BUY” recommendation at the current price of GBX 7,745.5 (as on 16th January 2020, before the market close, GMT 10:04 AM) with low double digit upside potential based on 6x NTM EV/Sales (approx.) on FY20E sales (approx.) and 25.77x NTM Price/Earnings (approx.) on FY20E earnings per share (approx.).
 
 
*All forecasted figures and peers have been taken from Thomson Reuters. Currency exchange rate taken for 1 USD = 0.765962 GBP.

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