AstraZeneca growth just the tonic for boss Pascal Soriot

The drugmaker, where he has been chief executive since 2012, was the subject of an unwanted £69.4bn takeover bid from Pfizer, the US drugs giant, with many expecting the Frenchman to lose the battle.

AZ, Britain’s second-largest quoted drugmaker, appeared to be a sitting duck. Its sales were forecast to fall sharply in coming years as its previous blockbuster drugs, such as the cholesterol treatment Crestor and the peptic ulcer treatment Nexium, lost patent protection.

Mr Soriot’s task was to convince AZ’s City fund managers, many of whom are notoriously short-term in their thinking, that the company’s longer-term prospects were sufficiently healthy for them to back him and turn away Pfizer’s money.

That was not a straightforward bet.

Even before Pfizer launched its bid, Mr Soriot had warned that AZ’s sales would not start to grow again until 2017, while investors were asked to believe that a business whose new products had become notorious for failing to make it to market was capable of developing new blockbusters.

Today’s results from the company, covering the first three months of the year, offer vindication for those who were prepared to back Mr Soriot.

Sales for the period were $5.5bn, up 10% on the same months a year ago, while core operating profits, the group’s preferred measure, rose by 84% to $1.65bn.

The sales growth was thanks mainly to a trio of new cancer treatments.

These are Lynparza, used on the treatment of ovarian and breast cancer, whose sales were double what they were in the same period last year; Imfinzi, used to treat lung and bladder cancer, whose sales were more than three times greater than in the same period last year and Tagrisso, a lung cancer treatment, whose sales were almost double those of the same period a year ago.

The improvement meant that AZ’s sales have grown in each of the last three quarters and Mr Soriot noted with satisfaction: “Globally, Tagrisso became AstraZeneca’s biggest-selling medicine in the quarter.” Oncology now accounts for just over one-third of sales.

It would be wrong, though, simply to assume all of AZ’s current growth is coming in the field of oncology.

Plumicort, the asthma treatment, saw its sales rise in the quarter by 11% on a year-on-year basis, while Farxiga, the diabetes treatment, was up by 17%. The latter’s sales look set to carry on growing as it has only recently been approved in the EU for treatment of type-1 diabetes.

Nor is this a company dependent on developed markets like the United States – traditionally the most important market for big pharma – Europe and Japan. Emerging markets are now AZ’s largest region by product sales and, here, the company raised revenues by 14% to just over $2bn.

Within that, sales in China – which have more than doubled since Mr Soriot took the helm – rose by 21%, while sales in Russia grew by 44%.

China, in particular, is the market to watch. It is now the world’s second largest pharmaceuticals market and, with its population beginning to age, chronic diseases such as diabetes and cancer are rising.

The government has been keen to close what it calls the “innovation gap” between China and western markets and, as a result, has introduced regulatory changes during the last two years to make it easier to new medicines to be sold in the country more quickly.

This is starting to make China an increasingly attractive market than some western countries where regulatory approval can take much longer for a new treatment.

That is not to say everything in the garden is rosy. Even though earnings were better than expected, the shares fell by more than 2% today, following a warning that the current pace of sales growth in China may not be sustainable.

Moreover, the shares have already had a great run, rising by 25% between the end of 2017 and the middle of March this year.

As the pharmaceutical team at Jefferies, the investment bank, told clients: “The impressive earnings per share growth trajectory at 17% compound annual growth between 2018 and 2023 is compelling, but the valuation dictates maintaining a ‘hold’ [stance, rather than a ‘buy’ recommendation].”

Meanwhile, there are concerns in some quarters about the company’s borrowings, with net debt standing at $16bn at the end of the period.

But the overall story is positive. Today’s update painted a picture of a company performing far more consistently than this time 12 months ago.

And even taking into account today’s share price fall, the shares still remain comfortably above the £55 offered by Pfizer, vindicating those who chose to stick with the company.

Sometimes the City is not as short-termist as it is often portrayed.

2019-04-28T21:09:05+00:00By |

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