AstraZeneca Solid And Safe, With Upside From Biologic Pipeline

| About: AstraZeneca Group (AZN)

Summary

Q2 results good news despite headwinds from patent expiry.

Brexit is not an issue. Maybe a takeover is in the wings.

Biologic pipeline progresses while revenues dominated by small molecule drugs.

AstraZeneca (NYSE:AZN) released its Q2 and first half 2016 results with an upbeat analysis.

Q2 results positive and well received

AZN is trading at close to a year high, up 8.7% to $34.29 today on good Q2 results. Q2 earnings of $0.83/share substantially exceeded last year's $0.60/share Q2 earnings, admittedly on lower revenues (last year Q2 $6.31 billion, this year Q2 $5.6 billion), which was due primarily to loss of patent protection on key products. FY16 guidance was unchanged.

A good sign is that AZN's growth platforms contributed to more than 60% of revenue. The earnings and revenue reported exceeded analyst expectations, which is always good news for the share price.

Brexit not an issue?

Since AstraZeneca is a British company, some have wondered about the effect of Brexit on the company and whether this might lead to an exit from the UK for the company. Given that 38% of AZN revenue comes from US sales, one would suspect that currency issues would favor AstraZeneca. It seems that the company is keen to reassure investors that they will remain British.

Is AstraZeneca a takeover target?

There also are takeover rumors circling, including the possibility of a bid from Novartis (NYSE:NVS). While it may not be Novartis, there seems to be an expectation of action, perhaps as AZN's immunotherapy pipeline is looking strong and well developed.

On the other hand AZN CEO Pascal Soriot has indicated that AZN has a full pipeline and is ready to get on with its programs, while not excluding AZN making acquisitions that are strategically aligned and earnings accretive.

AZN's sales reflect traditional small drug history, biologic sales just starting

AZN's respiratory portfolio represents an interesting example of the progression from traditional small molecule drugs toward biologics (monoclonal antibody based therapies).

Two traditional drugs in the respiratory portfolio (Symbicort and Pulmicort) account for most (86%) of the respiratory product sales ($2.1billion of $2.4 billion) and 19% of AZN's total product sales. So these are very important drugs.

Looking at the pipeline respiratory drugs, the new generation biologics are niche drugs that will be used to complement the traditional drugs. Benralizumab (anti-IL5 receptor monoclonal antibody) is for treatment of severe asthma as an add-on to traditional therapies. Tralokinumab is an anti-IL-13 monoclonal antibody which AZN has licensed to Leo Pharma for dermatology applications and which it is progressing for treating severe asthma. Like Benralizumab it is likely to be an add-on drug for asthma and COPD treatment.

It will be interesting to see how these biologic drugs will be priced and what percentage of respiratory sufferers will be prescribed these drugs. I assume that they will be expensive and may have a limited market acceptance.

For cardiovascular and metabolic disease product sales, small molecules drugs account for ~90% and a single traditional small molecule statin, Crestor, accounts for 46% of sales in this area. There are no monoclonal antibody drugs although injectable peptides Bydureon and Byetta account for 9.6% of product sales in this area.

In the case of cancer drugs, all product sales come from small molecule drugs, although there are a number of monoclonal antibody drugs in the pipeline.

In the case of Infection and Neuroscience 90% of product sales are for small molecule drugs, with a single biologic (monoclonal antibody drug) Synagis providing 10% of sales and live flu vaccine Flu Mist less than 1%.

In the near future we shall see how important the pipeline of biologic drugs will become. My hunch is that many will prove to be insufficiently effective and too costly for widespread adoption in the way that small molecule drugs have dominated modern medicine. There may be some sobering moments of truth as the biologic pipelines lead to registered drugs that will be competing in the marketplace.

Conclusion

Notwithstanding headwinds from patent expiry of key drugs, AstraZeneca has a high quality product profile and many new drugs in the pipeline. Whether it will remain in charge of its future or become part of a bigger pharma play remains to be seen. However from an investor perspective AstraZeneca is a quality play and a takeover would probably be good news.

Not specifically related to AstraZeneca, but it is worth watching how the emerging biologic drugs will perform. Monoclonal antibody based biologic drugs are expensive to manufacture and have commanded premium pricing. While there are some outstanding successes, they don't always work very well. I've thought for some time that something has to give as the expected earnings from all of the biologics under development would challenge even the most generous national medical budgets. It is reassuring that AstraZeneca has a solid portfolio of quality small molecule drugs.

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I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.