With the announcement of the cancellation of its share repurchase program with immediate effect, analysts have revised their estimates for AstraZeneca (AZN) and now forecast a decline in EPS for 2012 and beyond. We had already cited concerns with the company's earnings potential in our previous report, and continue to have a negative outlook on the stock. In light of the previous concerns and the latest development, we recommend that investors avoid the stock.
In our previous article on AstraZeneca, we highlighted the many problems that the company faces, and how the current situation signals an EPS reduction in the future. Specifically, we highlighted that cost-cutting restructuring initiatives had gone so far that any further reductions would not be viable for the company's long-term sustainability. JPMorgan's downgrading of the stock to "underweight" specifically mentioned that 2014 earnings could reduce by 10% from what analysts had estimated. What the market did not realize is that the company would eventually have to, and what the new strategy will call for, increase R&D and marketing spending for the sustainability of its business.
Now the company has announced that it is suspending its share repurchases with immediate effect. Net share repurchases had reached $2.4 billion for 2012, against an initial target of $4.5 billion. Last year the company spent $6 billion on repurchases, with the total amount since 2007 standing at $27 billion. The rationale for the cutback move is to allow for more "financial flexibility," while the board prepares to unveil its strategy in 2013. What this means for investors is that they remove share-repurchases driven growth from their thesis, as it dampens the increase in EPS. Credit Suisse for example forecasts a 5% decline in 2012 EPS and a 15% for 2016, following the news.
Astra is feeling the pain due to the exclusivity losses it is facing, and will continue to face in the near future. Seroquel has already lost its patent protection, and its cholesterol drug Cresto is facing pressure from generic versions of Pfizer (PFE)'s Lipitor. The pipeline doesn't offer anything exciting as well. Astra's traditional focus on developing branded prescription drugs is one of the problems that cast doubts on its ability to compete in an industry whose players are making efforts to break into the large generics market. For example, in another article, we presented the case of Pfizer, which has inked deals in China to gain access to the country's wide generics market.
The market potential for big pharmas is substantial if they set their sights on the right market, but as a report by IMS notes, these companies will only witness an insignificant amount of growth (of flat to 3%) in their branded medicines through 2016. What will expand is global generic spending, expected to increase by 77% by 2016. Emerging markets will play a leading role in the expansion, as their living standard increases and total spending on healthcare increases.
The stock is slightly down, following the news, and is trading near $47. The company has reiterated its core 2012 EPS guidance of $6-$6.3, whereas the market estimates EPS of $6.11 for 2012 and $5.85 for 2013, representing a 4.2% decline in 2013. The stock currently has an above market average dividend yield of 6%.
Table 1: Competitors
Bristol- Myers Squibb (BMY)
Eli Lilly (LLY)
We reiterate our negative outlook on the stock in terms of growth potential, and forecast no price appreciation. In fact, the company's initial shareholder-friendly plan of returning cash in the form of buy backs has been cut. We recommend investors to sell the stock until it becomes clear as to how the management plans to pave the way for the company's sustainability.