Uncertainty Prevails For AstraZeneca

| About: AstraZeneca Group (AZN)
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The Issue: is it a triggering point?

Questions regarding the unusually high death rates in heart patients consuming AstraZeneca's (NYSE:AZN) Brilinta and the associated side effects has caused the US Federal Drug and Administration (FDA) regulators to investigate the drug and its approval process undertaken two years ago. The treatment was approved in Europe in 2011 and the next year in US.

Criticism of the Trial

According to a research published by International Journal of Cardiology, many errors existed in the results reported during the drug approval study. The results were much more positive for the company's Brilinta than Sanofi and Bristol-Myers Squibb's drug Plavix where the research was looked over by AstraZeneca itself as compared to where a third party was assigned the task. Also, the drug tests are said to be heavily concentrated on the patients in the Eastern Europe. Specifically Poland and Hungary were pointed out to have accounted for 21% of the total tests conducted which was more than twice the participation rate of the United States and Canada together.

During its clinical trial, Brilinta aimed to prove its relatively higher efficiency as compared to its cheaper counter-part Plavix. The research had concluded back then that AstraZeneca's drug showed 9.3% of the patients had another heart attack, stroke or died from a cardiovascular disease as compared to 10.9% patients that were treated through Plavix.

Market sales

The drug has on the market for only two years. In fact even these two years, the company has not been able to pocket a lot of sales revenue and the top line growth contributed by Brilinta has been quite low as opposed to analyst and company management expectations. The company was able to secure 75 million in the third quarter of fiscal year 2013 as compared to 65 million in the previous quarter. The drug is yet to achieve its milestone in the cardiovascular drug industry which upholds multibillion dollar sales potential.

Suspected Implications

Brilinta was named as one of the five "growth platforms" to support the company that had been struggling to reload its drug pipeline. The probe initiated by the US investigators puts the company at high risk of defamation and may lead to insecurity among practitioners, surgeons and hospitals in recommending the company's other drugs to patients. Patients can also turn reluctant in consuming AstraZeneca's medicines in case the probe does not end the game in the company's favor. For future drug submissions made by the company, it may be subject to excessive scrutiny by the regulatory authorities worldwide.

Financial Impact of Expiring Patents

The loss of exclusivity of AstraZeneca's on several brands has resulted in the negative revenue growth of 4% on constant currency basis in the third quarter of fiscal year 2013. These brands were contributing as much as 350 million in annual constant exchange rate (CER) sales. The company's profit from its core operations has also plummeted by 29% to 2,207 million mainly due to the decreasing revenue and higher core operating costs.

Returning to Growth

Late stage pipeline

The company's late stage oncology pipeline has been replenished by three new Phase III clinical program starts; namely olaparib, selumetinib and benralizumab. Under the oncology segment, Selumetinib is being tested as a second-line therapy in patients with advanced or metastatic non-small-cell lung cancer (NSCLC) whose tumors are KRAS mutation-positive. The study has revealed a high and durable response rate of 37.2%. In fact, this clinical trial will be the first Phase 3 study to examine whether a MEK inhibitor together with chemotherapy is able to deliver better results compared to chemotherapy on a standalone basis in advanced or metastatic non-small cell lung cancer. Achieving success in this area of pressing clinical need can be very beneficial for the company to push up its declining revenue and profits.

Chinese Market

Sales had grown with lesser rigor in China in the recent quarter of 2013 on the back of reduced demand for drugs due to the Chinese crackdown on its pharmaceutical sector. Moreover, the drug distributors also focused on decreasing their inventory levels in order to reduce their probability of loss.

Source: AstraZeneca's Investor Presentation

AstraZeneca, being the second largest multinational in China, is likely to benefit the most from the growing Chinese drug demand in the upcoming years considering that it has one of the highest population country. The country's spending on drugs has grown at an average of 26% per annum during the last four years. Also, the trend that currently prevails in China is that patients are prescribed antibiotics even for the common cough as the low-paid government doctors are able to pocket some money from the kickbacks. This highlights the high demand for medicines for the ailment of any illness in China.

Attractive Dividend yield

The company is offering a very attractive dividend yield of 5.28% in an industry where 1.79% is the normal level. This is quite a valuable stock for investors that demand a regular income stream. However, the investigation by US regulators is what may stop an investor from initiating a position in this stock as the final verdict may significantly impact the future of this company.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.