AstraZeneca (AZN) is a U.K. based, global "full service" pharmaceutical corporation extensively engaged in research & development and marketing of a variety of medications. The current share price is hovering around $46. AstraZeneca markets a broad array of drugs, from neuroscience to infectious diseases. As of today, the company has 79 compounds in differing levels of clinical trials.
On October 1st, 2012, a new CEO, Pascal Soriot was appointed. His first act was to terminate a stock buyback plan to preserve capital. On October 25th, 2012, third quarter and nine month earnings were published. The material hard numbers are as follows:
- Overall revenue fell by 19% CER
- Emerging markets revenue increased by 6%, with revenue from China and Russia up 23%
- Overall profits were down 50% compared to the third quarter 2011
- Reported EPS was $1.22, down 50% from the third quarter of 2011
- Core EPS target for 2012 remained at $6.00 to $6.30
The bad player responsible for such a large amount of lost revenue is the 95%
reduction in sales of Seroquel IR, from loss of patent exclusivity. Normally Seroquel IR constituted 16% of AstraZeneca's total sales. To exacerbate the numbers, patent loss also affected sales of Atacand, Nexium, and Merrem. The loss or disposal of Astra Tech and Aptium represented about 2% of lost profits. Crestor sales fell 3% because of generic competition in Canada.
AstraZeneca's losses can be directly linked to the demise of patent exclusivity, generic competition, and government regulation. These are the same sad tunes all of Big Pharma is singing. Loss of patent exclusiveness haunts Pfizer (PFE), Novartis (NVS), Eli Lilly (LLY), and Sanofi (SNY) and others. Combine these companies with AstraZeneca, and it totals up to 30 to 40 billion dollars Big Pharma will not receive in revenue, for 2012. In 5 years, AstraZeneca will lose one-half of its existing patent protections. Other large pharmaceutical companies, such as Eli Lilly, Bristol-Myers Squibb (BMY), and Novartis all missed third quarter forecasts
These factors are particularly harmful to AstraZeneca that focuses on R&D of innovative drugs and markets the compounds as exclusive brand names. Unlike Pfizer, Merck (MRK), and Johnson & Johnson (JNJ), AstraZeneca has not expanded into the generics and healthcare products markets.
Projecting future expansion and growth rates for any company in the broader health care sector is risky business. There are too many unreliable or up in the air variables in health care reform to make reliable calculations. Regulations literally change daily. The analysts estimate AstraZeneca's growth rate from -3% to +2% over 3 to 5 years. Their historical growth rate is around 13% over 5 years. I, personally cannot vouch for these projections and would seriously doubt my own numbers.
For AstraZeneca margins are a bright spot. Gross margin of 81%, operating margin of 34%, and a net profit margin of 26% maintain consistent results over a 5 year period. AstraZeneca is at the top of the pile in Big Pharma regarding margins.
AstraZeneca is profitable, more so than most of the other leading pharmaceutical companies. Its recent Return on Invested Capital, the best indicator, calculates to 23%. The average for the remainder of the pharmaceutical subgroup is 12%.
AstraZeneca provides its shareholders with a good, steady and growing dividend. Currently, the indicated dividend is $ 2.85 per AVR-a yield of 6%. Dividend rates have grown annually for the past 7 fiscal years.
The Future for AstraZeneca
AstraZeneca is a dynamic company. It has several compounds in clinical trials. A potential, bright star is Brilinta. AstraZeneca is collaborating with Bristol-Myers-Squibb in the acquisition of Amylin and its promising new drugs to treat type II diabetes. With the prevalence of type II diabetes expected to increase 30% to 40% by 2020, this is a potentially enormous market. In August 2012, the European Commission authorized the marketing of Zinfora in Europe. This drug is a profitable cephlasporin antibiotic that targets methicillin-resistant Staphylococcus Aureus (MRSA) that is causing more and more serious infections. The fact Zinflora can be administered as monotherapy especially makes this agent attractive. Ardec Biosciences was acquired for 1.3 billion dollars in June 2012. Research into small molecules as treatment for serious diseases has been positive so far.
Brilinta is a heart medication recently placed into commerce by AstraZeneca in Europe and America. It is a type of antiplatelet, anti- coagulant in the same class as Plavix. Plavix and the generic form-clopidogrel are Brilinta's principal competitors manufactured by Bristol-Myers-Squibb and Sanofi. Recently, Brilinta received a class I recommendation (the highest) by the American College of Cardiology for use in unstable angina and non-ST-segment myocardial infarctions. In addition, Medicare Part-D has placed Brilinta on its unrestricted access medication list. This means Brilinta can be prescribed to Medicare beneficiaries at will without prior authorization. This renders Brilinta very user friendly for physicians. This compound generated 24 million in sales for AstraZeneca's third quarter 2012. The total number of prescriptions increased by 55% compared to the second quarter. Bristol-Myers Squibb and Sanofi are under fire from lawsuits seeking restitution for alleged harms caused by the use of Plavix. The litigation should facilitate Brilinta sales. AstraZeneca has entered the drug into numerous clinical trials hoping to discover other clinical indications for Brilinta's use. I am extremely sure they will be successful. Statistical analysis adjusting for 10% less margin, the incidence of coronary heart and peripheral vascular disease, and aging population show Brilinta most likely reaching 1 billion dollars in sales around 2014 to 2015, p-Value 0.05. This medicine will probably become a significant winner for AstraZeneca.
An overview on analysts that follow AstraZeneca found predominantly hold recommendations with a few buys. The company has pluses and minuses. The risk is moderate but can be managed. At this time, most health care sector corporations are risky due to the fluid and constant changes occurring in regulations governing health care.
There are two recent events that could impact pharmaceuticals. Just recently the FDA announced more stringent and costly requirements for generic drug companies to file ANDA-first filer applications. An ANDA is an abbreviated new drug application. Such requirements could potentially reduce the number of paragraph IV patent challenges that bombard the Big Pharma companies.
The other side of the coin, a Federal Appeals Court in Philadelphia ruled pay-for-delay agreements between large, brand name pharmaceutical companies and generic drug companies violate antitrust laws and are anticompetitive. Pay-for-delay settlements are agreements between the brand name drug company and generic manufacturer, ANDA-first filer. The bargain is not to produce and market a generic version of the patented drug for a certain period. The generic drug company gets compensated millions of dollars for doing nothing. The brand name company attains, in essence, a 5 to 10 lucrative patent extension. The antitrust issue will most likely end up argued in front of the U.S. Supreme Court. If ruled such agreements violate antitrust laws, it would have a significant impact on large pharmaceutical corporations. To what extent is difficult to forecast.
At this time, I would urge investors to avoid AstraZeneca. Those with an existing investment should hold. There is such turmoil in health care and future health care delivery that risk is difficult to quantitate. Those holding shares should enjoy AstraZeneca's dividends until the dust settles.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.