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Near-Term Risks Could Affect AstraZeneca Investorsd


AstraZeneca PLC (NYSE:AZN)

AstraZeneca PLC is engaged in the discovery, development, and commercialization of medicines for cardiovascular and metabolic disease; oncology; respiratory, inflammation, and autoimmunity; and infection, neuroscience, and gastrointestinal disease areas worldwide. In addition, it has 99 pipeline projects, which include 85 in clinical development and 14 approved, launched, or filed. The company markets its products to primary care and specialist doctors through distributors or local representative offices. AstraZeneca PLC was founded in 1992 and is headquartered in London, the United Kingdom.

The company’s five-year price to volume performance can be seen below. The large spike in share price occurred when Pfizer (NYSE:PFE) offered 55 pounds a share for a company in a failed takeover bid.

Fundamental Highlights

Guidance for the upcoming year for revenue and EPS is telling a much different story. AZN has guided revenues for the upcoming year to grow in the low single digits in terms of local currency, and for core EPS to decrease ~10%. Analyst recommendations are mostly in line with these estimates. This outlook is on the basis of current projects and the product pipeline outlook for the year. In addition, foreign exchange volatility is expected to be a key contributor to the problem.

Outlook

AstraZeneca is well positioned heading into 2015 in terms of upcoming news flow, which could drive long-term upgrades. It is also well above the average in the industry with 7 potential regulatory submissions in 2015.

Immuno-oncology remains critical to the positioning of the company in the next year. It has a robust opportunity outside of its usual drugs for lung, melanoma, and kidney cancer. All eyes will be on expanded and updated PD-L1 (MEDI-4736) CTLA-4 data at the American Society of Clinical Oncology. In addition, much interest is expected in new data on AZN’s OX40 fusion protein (MEDI6383) and fully humanized OX40 antibody (MEDI0562).

US Nexium generic launch by Ranbaxy (OTC:RBXLY) has been delayed as a result of the FDA’s prohibition on Ranbaxy’s Toansa facility, due to the consent decree related to manufacturing lapses. On Nov. 7th, 2014, the FDA withdrew Ranbaxy’s tentative approval, with the potential timing of a generic launch by another generic competitor unclear. It also remains unclear whether any other generic company will qualify for a 180-day exclusivity, or whether FDA could approve multiple generics for simultaneous launch.

Similar to the US Nexium situation, AstraZeneca had previously guided that generic Pulmicort Respules would launch by the end of 2014, which would mean a sharp fall in the Pulmicort Respules royalty that AstraZeneca books from Teva (NYSE:TEVA) in the other operating income line of their income statement.

Economic Moat Trend

The company’s near-term earnings story seems to be much less risky than in the past, as the company has made a strong commitment to hitting a $4.20 core EPS floor through cost cutting. This is likely to be supplemented by deals and asset divestment.

The PEGASUS-TIMI 54 study, a large-scale outcomes trial involving over 21,000 patients, successfully met its primary efficacy endpoint. The study assessed Brilinta tablets at either 60 mg twice daily or 90 mg thrombotic events in patients who had experienced a heart attack one to three years prior to the study (secondary prevention). This success is doubling the eligible population of patients for this drug and remains a key project for the company.

Like most pharma producers, margins can be all over the board. Margins have declined in recent years, but the company’s commitment to cost cutting should help boost this in the coming years.

Important Dates

Early 2015Brilinta PEGASUS trial read-out
June 2015
  • ASCO Immuno-oncology mono and combo data presentation
4Q15
  • ATLANTIC Phase II PD-L1 mono data, potentially ready for file
Second Half 2015
  • OX40 Prostate cancer Phase Ib data

Major Risks

  1. Worse than expected margin deterioration from generic competition, with no acceleration in Brilinta’s global sales trajectory.
  2. Failure of key pipeline products (selumetinib, olaparib, AZD-9291, MEDI-4736, tremelimumab, benralizumab, and tralokinumab) to reach the market.
  3. Divided cut following a large-scale M&A transaction.
  4. Rapid slowdown in emerging market growth prospects.

Investment Rationale

AZN is well positioned to deliver at least 10 exciting new drugs over the next 5 years, and analysts forecast the business to evolve from having >60% primary care small molecule exposure to becoming a leader in biologics and specialty care with particularly exciting opportunities in oncology and immuno-oncology as well as respiratory biologics

Sustainable fundamental success will be based on Brilinta and the oncology (Immuno-Oncology) progress. The diabetes presence helps but, with the exception of the SGLT2 based product, this is still largely a “me too” presence. The year 2015 will provide significant clarity for Brilinta and outlook.

However, near-term earnings growth is challenged by patent expirations. The Crestor patent is about to expire in 2016, and we expect AZN to fully support both the pipeline progress and the commercial progress of the key growth platform. As a result, analysts expect ongoing pressure on both earnings and cash flow in 2015 and 2016

AstraZeneca currently trades at $70.69 (closing price as on 26th January) with its 52-week range of $61.75-$82.68 and looks fairly valued with potential upside only over the long term. The Vuru DCF price shows the company is currently overvalued by 10%.