Biotech Values

[DewDiligence]

AstraZeneca Is Running to Stand Still

[One of AZN’s best hopes for a new big-selling drug is Certriad, the Crestor+TriLipix combo pill to be co-marketed with ABT that’s not yet on the market (#msg-38514635). Promising NCE’s in AZN’s pipeline are few and far between; AZD0837, an oral DTI, has potential, but it’s very late to the show (#msg-36811828).]

http://online.wsj.com/article/SB10001424052748703389004575032830055998608.html

›JANUARY 29, 2010, 2:03 P.M. ET
By HESTER PLUMRIDGE

Like other major pharmaceutical groups, AstraZeneca's challenge in 2010 is to keep running to stand still. The U.K. drugs group may have reported Thursday a 23% rise in operating profit in 2009 to $13.6 billion, but this was largely due to the one-off boost from the swine-flu scare, which boosted vaccine sales.

Strip this out and AstraZeneca's long-term challenges remain considerable, reflected in lower than expected earnings guidance that caused the shares to fall 4.6%.

The risks to growth for the group are well documented. Seven of its drugs, including three bestsellers, face generic competition by 2014, a higher ratio than major European competitors. As a result AstraZeneca trades at a price-to-earnings ratio of around eight times forward earnings, compared to over 10 times for GlaxoSmithKline, Novartis and Roche Holding.

Meanwhile, growth in its second-largest market, the U.S., has stalled in recent years. With the vaccine effect stripped out, last year's revenue growth registered a disappointing 2%, in line with 2008 but below the 8% to 15% growth it achieved mid-decade. This year, two of its best-selling drugs, Crestor and Seroquel, face a patent dispute and damaging liability claims, respectively.

The result is that AstraZeneca now predicts a mid-single-digit decline in revenues this year, while it estimates medium-term operating margins could fall as low as 48%, from 55% last year, despite an announcement to cut 10,400 jobs and restructure its research-and-development department, saving $1.9 billion a year by 2014.

That was a disappointment to investors who had hoped cost-cutting and restructuring might drive faster-than-expected earnings growth, even in the absence of new product launches. At the same time, investors were unimpressed by a 12% increase in the dividend and the promise of up to a $1 billion share buyback in 2010, having expected a faster return of cash to shareholders.

That said, the 5.1% yield should offer some support to the share price while a multiple of just eight times forecast 2010 earnings–a substantial discount to the sector–is hardly demanding. If 2010 growth is revised upward, as its conservative estimates often are, or if the pipeline delivers some pleasant surprises, then the investment case looks more convincing.‹