AstraZeneca PLC (LON: AZN) – Beaten the forecasts for half-yearly results on strong drug sales while maintaining the financial guidance for FY20

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 6 April 1999 after the merger of Astra AB and Zeneca Group PLC. It is headquartered in Cambridge, United Kingdom. Presently, the merged entity AstraZeneca is present in over 100 countries. Currently, the Company has a robust pipeline in place with 166 projects in clinical pipelines and 9 new molecular entities in late stage pipeline. The research and development (R&D) expenditures were around US$6 billion in 2019, and R&D platforms are currently focussing in three major areas – Oncology, Renal, Cardiovascular & Metabolism and Respiratory & Immunology. 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.

 

(Source: Presentation, Company Website)

Key Fundamental Statistics



Industry Outlook Dynamics

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 had risen from 31 million in 2000 to 41 million people in 2016. Moreover, increasing urbanisation 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).


(Source: Annual Report, Company Website)

As per the recent publication from the Report Linker, the global pharmaceutical spending is projected to hit USD 1.57 trillion by 2023, wherein North America would retain the leading position with a market share of around 45%. At the same time, pricing, patient exclusivity, and regulations are presenting challenges as well as opportunities.

Growth Prospects and Risk Assessment

Considering the changing healthcare trends, AstraZeneca has refreshed the strategic focus towards the requirement of 2025. The Group is focusing 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. 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. For example, the commercialisation of Calquence (acalabrutinib) in the European Union can be a significant step for future growth since there were around 105,000 new cases globally in 2016 with chronic lymphocytic leukaemia and numbers are expected to grow. Similarly, the recent approval of Breztri Aerosphere will help in treating around 384 million people globally.

The Company has accelerated growth organically and through acquisitions. For example, the recent collaboration with Daiichi Sankyo will help in launching Enhertu, to expand their pipeline in Oncology. Furthermore, the recent organisational changes are expected to improve speed and efficiency, and there are 166 projects in the pipeline, with 9 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 the market share and global presence. 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.
 

(Source: Presentation, Company Website)
 

However, it faces significant pressure from regulatory changes with the threat of price controls increasing across all the 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 Covid-19 pandemic can cause a significant delay in the delivery of pipeline and new medicines. Moreover, failure to meet ethical requirements or regulatory for medicine approval or development; failure to enforce, defend and obtain effective IP (intellectual property) protection or third parties challenges, could result in intellectual property and medicine pipeline risks. The Group is also exposed to commercialisation risks such as competitive pressures, affordability, pricing and delays or failure in quality execution of commercial strategies.

Segment Analysis

The Product portfolio is broadly differentiated in the following areas:
 

1. Oncology: Contributed 37% of total revenue in FY19. The major product includes – Tagrisso, Imfinzi, Lynparza and Faslodex.

2. Cardiovascular, Renal & Metabolism: Contributed 29% of total revenue in FY19. The major product includes – Brilinta, Farxiga and Crestor.

3. Respiratory: Contributed 23% of total revenue in FY19. 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 revenue into four main regions - Emerging Markets, United States, Europe, and Established Rest of World, which contributed 35%, 33%, 18% and 14% of revenue, respectively, in FY19.


(Source: Presentation, Company Website) 
 

Key Corporate Actions and Commercialisation & Development of Drugs

4 August 2020: AZN announced the issuance of global bond offering totalling US$3 billion into three tranches  - US$1.3 billion of fixed rate notes with a coupon of 1.375% (maturing 6 August 2030); US$1.2 billion of fixed rate notes with a coupon of 0.700% (maturing 8 April 2026), and US$0.5 billion of fixed rate notes with a coupon of 2.125% (maturing 6 August 2050).

30 July 2020: Granted Breakthrough Therapy Designation in the US for Tagrisso (osimertinib), which will help to patients with early-stage EGFRm lung cancer. 

29 July 2020: Appointed Michel Demaré as Chairman of the Remuneration Committee, effective from 1 August 2020.

28 July 2020: Farxiga's Phase III trial showed a statistically significant effect on the treatment of patients with chronic kidney disease.

27 July 2020: Received marketing authorisation in the European Union for Calquence (acalabrutinib) and Imfinzi (durvalumab), which helps in the treatment chronic lymphocytic leukaemia and extensive-stage small cell lung cancer, respectively.

27 July 2020: Collaborated with Daiichi Sankyo Company, Limited for DS-1062 (which is currently engaged in the treatment of multiple tumours that commonly express the cell-surface glycoprotein TROP2). AZN will pay an upfront payment of $1 billion to Daiichi Sankyo in staged payments.

24 July 2020: Received approval for Breztri Aerosphere (budesonide/glycopyrrolate/formoterol fumarate) in the US for treating chronic obstructive pulmonary disease (COPD).

20 July 2020: The Phase I/II COV001 trial of AZD1222 demonstrated robust immune responses against the SARS-CoV-2 virus in all evaluated participants.

8 July 2020: Lynparza received approval in the European Union for patients with germline BRCA-mutated metastatic pancreatic cancer.

13 June 2020: Received order for supplying 400 million doses of the University of Oxford's COVID-19 vaccine by the end of 2020.

1 June 2020: Received approval for Brilinta (ticagrelor) in the US for controlling the risk of a first heart attack or stroke in patients with coronary artery disease.

18 May 2020: Received approval for Bevespi Aerosphere (glycopyrronium/formoterol fumarate) in China for patients with chronic obstructive pulmonary disease.

 



(Source: Presentation, Company Website)

Progress of Key Performance Indicators in 2019 for Strategic Priorities

The Group measures the 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 has 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.

(Source: Annual Report, Company Website)

Top Shareholders

Research and Development Pipeline Schedule 
 



(Source: Interim Report, Company Website) 
 
Financial Highlights – Improved Financial Performance in H1 FY2020 (30 June 2020, USD, million)


(Source: Interim Report, Company Website)

In the first half of the financial year 2020, driven by the improved performance of new medicines business, growth across therapy areas and regional growth for the period, the total revenue surged by 12% on AER basis to $12,629 million (H1 FY2019: $11,314 million). The gross profit stood at $10,225 million in the first half of the financial year 2020 (H1 FY2019: $9,122 million), reflecting an increase of 12% and 14% on AER and CER basis, respectively. The operating profit increased by 57% on AER basis to $2,504 million in the first half of the financial year 2020 (H1 FY2019: $1,590 million), reflecting controlled operating expenses and higher revenue.

The PBT (profit before tax) increased significantly to $1,896 million in H1 FY2020 (H1 FY2019: $899 million), reflecting lower finance expenses and higher operating profit margins. The Group’s PAT (profit after tax) for the first half of the financial year 2020 stood at $1,488 million (H1 FY2019: $670 million). The earnings per share increased to $1.17 in the H1 FY2020 (H1 FY2019: $0.56). The cash balance stood at $5,673 million as on 30 June 2020 (31 December 2019: $5,369 million, 30 June 2019: $5,428 million).

Financial Ratios: Decent Profitability Margins and ROE

The profitability metrics in the first quarter of the financial year 2020 stood in line with the industry median, reflecting higher revenue generated and better control over expenses. AstraZeneca Plc has delivered a decent return for the shareholders as return on equity of 6.5% was higher as compared to the industry median. On leverage front, the debt-equity ratio of the AstraZenecaPlc’s was 1.72x, which was higher as compared to the industry median of 0.44x,reflecting that the Company is more leveraged as compared to peers.  

Share Price Performance


Daily Chart as on 6 August 2020, before the market close (Source:Refinitiv, Thomson Reuters)
 

On August 6, 2020, at the time of writing (before the market close, at 8:39 AM GMT), AstraZeneca Plc shares were trading at GBX 8,463.00, down by 0.44 per cent against the previous day closing price. Stock 52 week High and Low were GBX 10,120.00 and GBX 5,871.00, respectively.

Bullish Technical Indicator

From the technical standpoint, 14-day RSI is currently in an oversold zone, which means there is a good potential for a short term rebound in the stock price.

AstraZeneca Plc Vs FTSE 100 Index (1 Year)


(Source: Refinitiv, Thomson Reuters)

In the last year, AstraZeneca Plc share price has delivered 19.70 per cent return as compared to negative 15.60 per cent return of FTSE-100 index, which shows that the stock has outperformed the index during the last year.

Valuation Methodology

Price/Earnings Approach (NTM)



To compare AstraZeneca Plc with its peers, Price/Earnings multiple has been used. The peers are Indivior Plc (Price/NTM Earnings was 68.11), Abcam Plc (Price/NTM Earnings was 49.07), Hikma Pharmaceuticals Plc (Price/NTM Earnings was 16.74), GlaxoSmithKline Plc (Price/NTM Earnings was 13.20) and Bayer AG (Price/NTM Earnings was 7.58). The Average of Price/Earnings (NTM) of the company’s peers was 30.94x (approx.).

Business Outlook Scenario

The Company affirmed that the recent issuance of bonds would not affect the financial guidance for FY20. In FY20, total revenue is projected to surge by a high single-digit to a low double-digit percentage, while EPS should increase by a mid- to high-teens percentage. Meanwhile, the Company is focusing on improving operational leverage while the capital expenditure will remain broadly stable as compared to the previous year. The guidance and operational growth are underpinned by the exciting pipeline of new medicines and the focus is on commercial execution.


(Source: Presentation, Company Website)

In the first half of the financial year 2020, the Group witnessed an increase in financial performance despite an unprecedented situation as prevailing currently due to Covid-19 mayhem. The Group witnessed an increase in the revenue across the portfolio of therapies and products in all locations. AZN’s new medicine performed well and delivered a growth of 42%, with a strong pipeline and regulatory approvals from authorities. 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. The full-year guidance is supported by exciting new medicines pipeline and focused commercial execution.

Based on the decent growth prospects and support from the valuation as done using the above method, we have given a “BUY” recommendation at the current price of GBX 8,401.00 (as on 6 August 2020, before the market close at 9:47 AM GMT+1), with lower double-digit upside potential based on 30.94x Price/NTM Earnings (approx.) on FY20E earnings per share (approx.).
 
*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.
*Dividend Yield may vary as per the stock price movement.

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