Earlier in January, Astrazeneca (AZN) announced that group turnover had slumped 7 percent to almost $28bn in 2012, in turn driving pre-tax profit a massive 38 percent lower to $7.7bn. The results were driven by the loss of exclusivity across a number of its key brands with formerly patent protected medicines accounting for 85% of the revenue dip.
For some time now the company has faced criticism as it has failed to adequately boost its new product pipeline to compensate for significant current and looming patent expirations.
Despite widespread worries over its product pipeline, what many people do not seem to realize is that AstraZeneca still has 71 projects in the clinical phase of development, with another 13 either approved, launched or filed. It also has joint collaborations with Amgen (AMGN), the world's largest biotechnology company, to sell five pipeline products, as well as with Bristol Myers Squibb (BMY) to develop and sell several non-insulin diabetes drugs.
New chief executive Pascal Soriot was recruited in October to counter the impact of patent expirations, which are expected to drive revenues down to $21bn by 2018. Soriot will review operations and activities, and oversee a massive restructuring of the group, which includes the establishment of new research bases across Europe and North America, designed to underpin long-term innovation.
Strategy to return to growth
Having concluded a six month strategic review, last week, AstraZeneca published its eagerly awaited report outlining their strategy for a return to growth.
The restructuring plan goes into a lot of technical detail about their research and development plans and one of the effects of the proposed reorganization, due to the concentration of its R&D activities into three global hubs in Sweden, the USA and the UK, is that there will be a substantial reduction of staff numbers with staff being cut by 10 percent in the next three years. This and other changes will result in a huge, though one-off, charge of $2.3bn of which $1.7bn will be a cash cost. Benefits of $800m per annum from all this are expected by 2016.
Importantly though, Astrazeneca is to remain a pure-pharmaceutical company concentrating on three medical areas including cancer, cardiovascular diseases and respiratory or inflammatory disorders while ruling out diversification into areas such as non-prescription and veterinary medicines, with Soriot expressing confidence that 2018 revenues will "significantly exceed" $21bn consensus sales forecasts.
Rather than focusing on one or several major acquisitions, instead AstraZeneca intends to make the most of its existing pipeline, consider 'bolt-on' acquisitions and to seek collaboration with third parties. The first of which has been a number of deals with several companies that use so-called RNA molecules to attack certain illnesses.
AstraZeneca has been underperforming the last few years in comparison to many of its peers, leaving investors increasingly disillusioned with the shares. However, AstraZeneca's strategy to return to growth will take time. In the meantime its underperformance was one of the main reasons why AstraZeneca had a relatively high yield for some time.
The type of high quality dividend paying companies we are after are frequently those to which the stock market has taken a temporary dislike by selling the shares down and thereby driving up their dividend yields, assuming the dividends are not cut in proportion. And that's exactly what has happened here.
With a track record of having quadrupled its dividend since 2003, AstraZeneca remains committed to maintaining a progressive dividend policy under which the dividend payout will be held or grown with a target cover of twice core earnings over their investment cycle. This clearly suggests to me that the dividend won't be cut, though there can never be any guarantees of that with any stock. The 2013/14 dividend forecast in pound sterling is approximately 191 pence per share. What is rather unfortunate is that part of AstraZeneca's new dividend payout policy also now includes making share buybacks when they feel like it.
Additional disclosure: The Dividend Income Portfolio purchased AstraZeneca shares on one occasion, last year, when its shares were trading well within 10 percent of their then historically undervalued share price levels.