Astrazeneca still a 'buy' after profit warning, says Deutsche Bank

Deutsche Bank has reiterated a ‘buy’ rating on Astrazeneca but cut the target price to 5,500p from 6,000p after the drug maker warned that profit and revenue would fall this year.

Last Thursday Astrazeneca issued a profit warning as cheaper generic versions of its cholesterol drug Crestor continue to hurt sales.

The pharmaceuticals group said it hopes that 2017 will be the earnings trough. However, its recovery will depend on the success of new medicines and results from a clinical trial of a combination of two lung cancer drugs.

“Although we see a greater risk that material earnings per share (EPS_ growth is delayed into 2019 and view Astrazeneca as more dependent on pipeline delivery, we continue to see positive risk-reward ahead of a major flow of pipeline catalysts through 2017,” said Deutsche Bank.

“With our forecasts suggesting a 2017-20 EPS compound annual growth rate of 14%, we maintain our ‘buy’ rating with a lowered 5,500p price target.”

AstraZeneca expects core EPS in the current fiscal year to fall by a low to mid-teens percentage in local currency terms from 2016's level of $4.31. It has also forecast a low to mid single-digit percentage decline in revenue.

The company’s guidance was in line with consensus forecasts.

Meanwhile, the group anticipates an increased share of profits coming from asset sales and partnership income.

Deutsche Bank said such “externalisation” and other operating income is expected to contribute to greater than $900m more of profits than expected.

“We have also reduced our pre-externalisation operating margin assumptions leading us to lower our 2018-2022 core EPS forecasts by 5-10%,” the bank said.

“Given the dependence of 2017 earnings on externalisation income, we see a greater risk that a return to material EPS growth is pushed into 2019.”

The bank concluded that risks for the firm include failure to deliver cost savings, lower sales from the growth platforms, pipeline failure and lower commercial potential of pipeline drugs.

Shares in Astrazeneca on Monday rose 0.78% to 4,392p at 1014 GMT.