AstraZeneca slips on Jefferies downgrade over externalisation impact

AstraZeneca's strategy of disposals and 'externalising' revenues from selling licensing rights to its drugs will hit revenues and earnings more than the market realises, Jefferies said on Monday, downgrading its rating on the shares to 'hold' from 'buy'.

Jefferies cut its price target to 5,050p from 5,350p.

Adjusting its forecasting model due to the cumulative impact of future revenue externalisations and disposals, combined with lower durvalumab and tremelimumab sales estimates for non-small cell lung cancer (NSCLC) that are less than offset by increases to durva/treme in SCLC and Lynparza, Jefferies cut its revenue estimates by up to $1.5bn, around 6%.

This equated to core earnings per share estimates being cut by up to 9% to $3.77 in 2018 and by 11% to $4.16 in 2019.

"We and consensus have been guilty of failing to reflect the impact of future revenue externalisation and asset disposals on revenue and EPS growth," Jefferies analyst Jeffrey Holford wrote, saying consensus may overestimate
revenue by up to $2.5bn.

The analyst warned the dividend may also not be covered until 2021 by cash flow from underlying operations based on his updated estimates.

Although Holford saw significant potential for durva/treme in NSCLC, he suggested the design of the Mystic study may be an underappreciated risk for investors.

"The shift to a co-primary endpoint could be a mistake, given cross-over will likely confound Overall Survival and the study may already be underpowered," he added, lowering peak sales estimates for durva and treme in NSCLC by $1.7bn and $1.1bn, respectively, though this is primarily due to competition from rival combinations of chemotherapy and immuno-oncology combos.