Key Investment Highlights
 

1. AstraZeneca Plc (LON: AZN) constantly focuses on its innovation capabilities to provide a wider range of distinctive products for the clients. The group has a broad range of tools and applications to support research, which can prove to be a gamechanger to scale up the business operations and accelerate market value.

2. The group has strong revenue growth trajectory, with a decent operational performance for the period.

3. AstraZeneca is implementing Data Science and Artificial Intelligence across its R&D initiatives to discover new life-changing medicines.

4. At present, the company has a strong pipeline with 167 projects, and 7 molecular entities are at late-stage.

5. The company conducts research in multiple areas such as Oncology, Cardiovascular, Metabolism, Renal, Immunology and Respiratory, and has a wide array of products to make life better.

6. The group is confident towards its business model and management team to tackle the uncertain times.

7. AZN is exploring the full potential of its existing medicines and rapidly advancing the pipeline for continued success.

8. The Group has been able to dedicate progressive amount into Research and Development initiatives consistently.
 

AstraZeneca PLC (LON: AZN) is expecting 2020 to be another year of progress, with product sales growth and further grasping opportunities lying in new product developments, while reinforcing focus to climate change and decarbonization targets.

AstraZeneca PLC is a FTSE 100 listed science-led biopharmaceutical company, which focuses on the development, commercialisation, and discovery of prescription medicines. It was established on 6th April 1999 after the merger of Astra AB and Zeneca Group PLC and is headquartered in Cambridge, United Kingdom. Today, the merged entity AstraZeneca is present in over 100 countries. The Company has a robust pipeline in place with 167 projects in varying stages of clinical development, 7 new molecular entities (at a later stage) and 1 new molecular entity (approved in the last quarter.). Its research and development (R&D) expenditure was around USD 6 billion in 2019, and R&D platforms are currently focussing in three major areas – Oncology, Renal, Cardiovascular & Metabolism and Respiratory. The Group employs over 70,600 people, while around 45.4% of senior positions are led by women and over 3,100 employees holding PhDs.

The Company will announce its half-yearly results for 2020 on 30^th July 2020.


(Source: Annual Report, Company Website)

Segments at a Glance
 

The Product portfolio is broadly differentiated in the following areas:

1. Oncology: Contributed 37% of total revenue in 2019. The major product includes – Tagrisso, Imfinzi, Lynparza and Faslodex.

2. Cardiovascular, Renal & Metabolism:Contributed 29% of total revenue in 2019. The major product includes – Brilinta, Farxiga and Crestor.

3. Respiratory: Contributed 23% of total revenue in 2019. The major product includes – Symbicort, Pulmicort and Fasnera.

4. Other Disease Areas:Contributed 11% of total revenue in 2019. The major product includes – Synagis, FluMist, Movantik, Vimovo, Nexium, among others.
 

Geographically, the Company segregates its revenue in four main regions - Emerging Markets, United States, Europe and Established Rest of World, which contributed 35%, 33%, 18% and 14% of revenue, respectively, in FY2019.


(Source: Annual Report)

Key Statistics



Progress of Key Performance Indicators in 2019 for Strategic Priorities
 

The Group measures its performance across three strategic priorities:

1. Delivering product sales growth and leading the Therapy area market.

2. Accelerating Innovation for new opportunities.

3. Become a great place to work.
 

Key Highlights of 2019 against 2018: In light of above strategic priorities, AZN achieved 8 new molecular entities in Phase 3 of drug development, distributed USD 3.6 billion in dividends, spent USD 6 billion in R&D, grew sales by 19% (or actual exchange rate basis) and 86% employees agreed that AZN is a great place to work.

Significant Developments of 2020 – Perseverance towards Covid-19 drug development
 

1. 30^th April 2020: AstraZeneca collaborated with the University of Oxford for manufacturing and distribution of the potential vaccine to prevent Covid-19 infection.

2. 23^rd April 2020:  AstraZeneca initiated randomised Phase III trial of Farxiga in treating the hospitalised Covid-19 patients with Saint Luke’s Mid America Heart Institute.

3. 2^nd April 2020: The AZN Group announced the completion of disinvestment regarding the manufacturing of Movantik, for a consideration of USD 52.5 million from RedHill.

4. 13^th January 2020: AZN announced that it had agreed to shut Phase III STRENGTH trial for Epanova.
 

Top Shareholders

 

Q1 Trading Update for FY2020: Robust Results and Leveraging Scientific Expertise


(Source: Quarterly Report, Company Website)
 

1. In the first quarter of the financial year 2020, driven by an increase in the product sales and increased revenue from all therapy across regions, the group reported growth in total revenue by 16 per cent to USD 6,354 million in Q1 FY2020. The revenue surged by 17 per cent in the CER (constant exchange rate) basis.

2. Due to the impact of one-off adjustments, the group’s reported gross profit margin and core gross profit margin declined by 2 percentage points to 77 per cent and 78 per cent, respectively.

3. The reported total operating expenses surged by 9 per cent to USD 4,194 million and core total operating expenses went up by 7 per cent to USD 3,600 million in the Q1 FY2020.

4. The group’s reported operating profit margin and core operating profit margin declined by 1 percentage point to 19 per cent and 29 per cent, respectively.

5. The group’s reported earnings per share surged by 27 per cent on the actual basis to $0.59, while the core earnings per share stood at $1.05 for the period, reflecting an increase of 17 per cent on actual basis. 
 

Financial Highlights – FY 2019 and Q4 2019 with strong revenue growth


(Source: Annual Report, Company Website)
 

1. For the financial year ending 31^st December 2019, due to an increase in the sale of new medicines and growth in the therapy area, the product sales went up by 12 per cent to USD 23,565 million, while in Q4 FY2019, the product sales went up by 8 per cent to USD 6,250 million.

2. Driven by an increase in product sales, the group’s revenue surged by 10 per cent to USD 24,384 million in FY2019 and 4 per cent in Q4 FY2019 to USD 6,664 million.

3. Due to increase in the operating expenses and R&D expenses for the period, the reported operating profit declined by 14 per cent to USD 2,924 million in FY2019 and 46 per cent in Q4 FY2019 to USD 577 million.

4. The core operating profit increased by 13 per cent to USD 6,436 million in FY2019, while core operating profit declined by 29 per cent to USD 1,545 million in Q4 FY2019.
 

Financial Ratios: Decent Profitability Margins and ROE

 

The reported Gross margin, EBITDA margin and Net margin stood at 80.30 per cent, 23.80 per cent, and 5.00 per cent, respectively, for the FY2019. The Return on Equity of 10.4 per cent in the financial year 2019 stood higher than the industry median. On the liquidity front, AstraZeneca Plc’scurrent ratio was lower than the industry median of 1.40, reflecting insufficient current assets to pay its short-term obligations. On leverage front, the debt-equity ratio of the AstraZenecaPlc’swas 1.39x, which was higher as compared to the industry median of 0.36x.

Share Price Performance


Daily Chart as on 30^th April 2020, before the market close (Source: Refinitiv, Thomson Reuters)

On April 30, 2020, at the time of writing (before the market close, at 10:42 AM GMT+1), AstraZeneca Plc shares were trading at GBX 8,414.00, up by 2.52 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 8,491.00/GBX 5,626.00.

Bullish Technical Indicator

From the technical standpoint, its shares were trading well above its short-term support level of 20-day simple moving average prices, which reflects an uptrend in the stock and carrying the potential to move up further.

Valuation Methodology

Method 1: Price/Earnings Approach (NTM)



To compare AstraZeneca Plc with its peers, Price/Earnings multiple has been used. The peers are Abcam Plc (NTM Price/Earnings was 45.39), Lonza Group AG (NTM Price/Earnings was 37.89), Dechra Pharmaceuticals Plc (NTM Price/Earnings was 25.36), Hikma Pharmaceuticals Plc (NTM Price/Earnings was 17.88) and GlaxoSmithKline Plc (NTM Price/Earnings was 14.44). The Average of Price/Earnings (NTM) of the company’s peers was 28.20x (approx.).

Method 2: Price to Cash Flow Approach (NTM)



To compare AstraZeneca Plc with its peers, Price/Cash Flow multiple has been used. The peers are Abcam Plc(NTM Price/Cash Flow was 45.74), Laboratorios Farmaceuticos ROVI SA (NTM Price/Cash Flow was 27.32), Dechra Pharmaceuticals Plc (NTM Price/Cash Flow was 29.82), Hikma Pharmaceuticals Plc (NTM Price/Cash Flow was 16.40) and GlaxoSmithKline Plc (NTM Price/Cash Flow was 10.57). The Average of Price/Cash Flow (NTM) of the company’s peers was 26.00x (approx.).

Valuation Metrics


(Source: London Stock Exchange)
 
This analysis is a useful technique to decompose the different drivers of ROE. It can be further examined through three financial metrics which are: net profit margin, asset turnover and financial leverage. This analysis helps to deduce whether the company’s profitability, use of debt or assets that are driving ROE.

AstraZeneca Plc Vs FTSE 100 Index (1 Year)


(Source: Refinitiv, Thomson Reuters)

In the last year, AstraZeneca Plc share price has delivered 45.53 per cent returns as compared to negative 17.69 per cent returns of FTSE-100 index, which shows that the stock has outperformed the index during the last year.

Total Return 5 Years


(Source: Refinitiv, Thomson Reuters)
 
AstraZeneca Plc has generated a total return of 124.94 per cent in the last five years versus the total return of FTSE All share of 8.51 per cent for five years period.
 
Industry Outlook

The rapid growth in the overall and ageing population will increase the need for drug requirement. The World Economic Forum projected that non-communicable diseases (NCDs) could incur the cost of USD 47 trillion to the global economy by 2030 as the number of NCDs death has risen from 31 million in 2000 to 41 million people in 2016. Moreover, increasing urbanization will also lead to greater wealth and better healthcare requirement. Further, as per Strategy Analytics, it is estimated to have 38 billion internet-connected devices to be installed by 2025 globally. In 2019, Global pharmaceutical sales were also increased by 6% to USD 1,033 billion (as compared to USD 975 billion in 2018). The global pharmaceutical spending is projected to hit USD 1.5 trillion in 2023, representing CAGR of 3% to 6%. At the same time, pricing, patient exclusivity and regulations are presenting challenges as well as opportunities.

Considering the above changing trends, AstraZeneca has also refreshed its strategic focus towards the requirement of 2025. The Group is focussing on understanding the disease better and developing innovative medicines and redefining clinical trials. In 2019, the Group had a growth of 22 drugs in pipeline with 24 progressions on an average in the past four years.

Growth Prospects and Risk Assessment

The company keeps on launching new platforms and upgrade the old products and services to become one of the market leaders in the healthcare market. The company, through its wide-ranging scope, had accelerated growth organically and through acquisitions. The recent organisational changes are expected to improve speed and efficiency, and there are 167 projects in the pipeline, with 7 new molecular entities in the late-stage pipeline. The company’s focus is on Emerging Markets, especially China and other leading markets, such as Russia and Brazil, to improve its market share and global presence. 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.

Business Outlook Scenario

In the first quarter of the financial year 2020, the group witnessed an increase in financial performance despite unprecedented times. The group witnessed an increase in the revenue across the portfolio of products and therapies in all locations. AZN’s new medicine performed well, with a strong pipeline and regulatory approvals from authorities. The company operations are benefited by an increase in the inventory for short-term in the distribution channel, patient’s loyalty towards improved treatment-regimen and longer prescriptions. Capital expenditure is projected to be roughly stable and restructuring expenses will decrease against the previous year. The group is also monitoring the developments carefully and will provide appropriate updates.

Over the course of 3 years (FY16 - FY19), the company’s revenue surged from USD 23,002 million in FY16 to USD 24,384 million in FY19. Compounded annual growth rate (CAGR) stood at 1.96 per cent.

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 closing price of GBX 8,207.00 (as on 29th April 2020), with single-digit upside potential, based on 28.20x Price/Earnings (approx.) on FY20E earnings per share (approx.) and 26.00x NTM Price/Cash Flow (approx.) on FY20E cash flow per share (approx.).
 
*The “Buy” recommendation is also valid for the current price as covered in the report (as on 30^th April 2020).
*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

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