AstraZeneca PLC (NGS: AZN), a global pharmaceutical company, is BUY. AstraZeneca has returned to growth, after lagging for a few years amid pricing pressure and generic threats to its former blockbusters Nexium (for ulcers) and Crestor (for high cholesterol). Management has taken steps to address these challenges by cutting costs and assembling a strong new drug pipeline, including a promising checkpoint inhibitor product to treat various cancers. The company is also working on a COVID-19 vaccine, AZD1222; the results of its recent clinical trial have been both promising and controversial.
Our earnings forecasts for AZN call for mid-teens growth over the next two years. We also like the shares’ secure dividend, with a yield of about 2.6%. Two ADSs are equal to one ordinary share.
AstraZeneca’s programs to develop a vaccine and treatments for COVID-19 are moving forward. On November 23, the company, with its partner Oxford, announced that its vaccine candidate AZD1222 had met its primary endpoint of preventing the disease.
An independent data safety monitoring board (DSMB) determined in an interim analysis that trial results in the U.K. and Brazil met the primary endpoint of showing protection from COVID-19 14 days or more after participants had received two doses of the vaccine.
There were two dosing regimens in the study. The second regimen, with 8,895 participants, showed 62% efficacy when given as two full doses at least one month apart. The combined analysis from both regimens (n=11,636) resulted in an average efficacy of 70%. All results were statistically significant. The study will continue to generate additional data, and further analysis should refine the efficacy reading and establish the duration of protection. Oxford scientists said they are still trying to understand why the vaccine was more effective with a smaller first dose. The first dose is supposed to prime the immune system, while the second is supposed to boost its response.
Still, the fact that the halved-first-dose regimen came about by accident rather than design has cast doubt over the reliability of the efficacy data, and will likely complicate the company’s request to regulators for emergency use authorization. Further complicating matters, AZN announced that the initial half-strength dose wasn’t tested in older participants (over 55), who are especially vulnerable to COVID-19. By contrast, the Pfizer/BioNTech and Moderna vaccines were both tested in older patients.
Given these issues, and the fact that both the Pfizer and Moderna vaccines have shown more than 90% efficacy, we believe that AstraZeneca faces a high bar for authorization. On the positive side, the AZN vaccine can be stored at normal refrigerator temperatures and is less expensive than those developed by Pfizer and Moderna.
AstraZeneca indicated it would seek emergency authorization in the U.K, the European Union, and Brazil. It will also discuss the U.K. and Brazil trial data with the U.S. FDA in order to determine whether it should formally submit the data for review in applying for emergency authorization in the U.S. The U.S. trial of AZD1222 is ongoing.
The interim analysis includes 23,000 participants who received either the vaccine or the placebo. The company expects to enroll up to 60,000 participants globally.
AstraZeneca is ramping up manufacturing capacity with a goal of producing up to 3 billion doses of the vaccine in 2021.
Adjusted EPS fell 4% to $0.94. Total revenue rose to $6.6 billion (+3% as reported; +3% operational). Product revenue was $6.5 billion (+6% as reported; +7% operational).
By region, U.S. revenue grew 11%. Revenue in Europe declined 11%. Revenue in China grew 6%. These growth rates reflect the impact of COVID-19 in those regions.
Key growth drivers were Tagrisso (+30%), Imfinzi (+29%), Lynparza (42%), Farxiga (+35%), and Calquence (>100%). This growth was partly offset by declines in Bydureon (-14%) and Pulmicort (-55%). Pulmicort sales were hurt by the impact of COVID-19 in China.
The EBITDA margin was 30.2%, up 620 basis points.
In addition to its coronavirus vaccine, Astra is developing AZD7442, a long-acting antibody or LAAB, for the prevention of infection in people who have been exposed to the virus. LAABs, which mimic natural antibodies, may help to prevent disease progression in already infected patients, and may also be given as a preventative intervention prior to exposure to the virus.
The company also provided updates on the following pipeline products:
– Imfinzi received approval in the EU and Japan for extensive-stage small-cell lung cancer.
– Enhertu received approved in Japan for third-line gastric cancer in patients who express HER2+.
– Forxiga received approval in China for the additional indication of improving cardiovascular outcomes.
AstraZeneca has strong oncology and cardiovascular portfolios, which are helping to drive top-line growth.
EARNINGS & GROWTH ANALYSIS
The company reiterated its guidance for 2020. It continues to expect high single-digit to low double-digit revenue growth and mid- to high-teens growth in core EPS.
FINANCIAL STRENGTH & DIVIDEND
AstraZeneca has paid an annualized dividend of $1.40 per ADS since 2013. The current yield is about 2.6%. We expect the dividend to remain unchanged at $1.40 per ADS in 2020 and 2021.
MANAGEMENT & RISKS
Pascal Soriot became the CEO of AstraZeneca in October 2012 after previously serving as the COO of Roche’s pharmaceuticals division and the CEO of Genentech. Mr. Soriot led Genentech’s merger with Roche in 2009. Marc Dunoyer has been CFO since November 2013, and was previously executive vice president of Global Portfolio & Product Strategy at GlaxoSmithKline.
On a micro basis, the company faces the risk that key drugs may fail to hit endpoints in clinical trials.
Based in the UK, AstraZeneca PLC focuses on treatments for respiratory, autoimmune, and metabolic conditions, as well as on cardiology, neurology, and oncology drugs. The company has 70,600 employees.
AZN currently trades at 12.1-times our 2021 estimate for adjusted EPS, compared to the mean of 11.7 for our coverage universe of large-cap pharmaceutical companies. We believe the shares deserve a premium given the company’s pipeline potential. Our target price is $63.
On November 25, BUY-rated AZN closed at $52.60, down $0.97.