Berenberg raises target price on AstraZeneca

Berenberg stated AstraZeneca's second-quarter results brought about an expected earnings guidance upgrade, driven by the inclusion of Alexion earnings following the deal's closure and "a somewhat unexpected return" of the debate on where the group's expanding operating margin will settle.

"Friction exists between the highly positive margin drivers – of a shift towards specialty care and blockbuster status for new launches – and the negative margin constraints from profit shares, primary care exposure and investment in R&D," said Berenberg, which noted that its return on R&D investment analysis supported management's plans to reinvest profits into the pipeline.

The German bank also said through its "intense period of patent expiries", AstraZeneca supplemented its operating profit with non-core disposals and pipeline collaboration revenues. At its low point in 2018, it estimates that the company's underlying operating margin was 13%.

However, Berenberg pointed out that AZN management executed a pipeline transformation, the rewards of which were now driving double-digit top-line growth and margin expansion from this exceptionally low base.

"We raise our EPS forecasts by 8-14%, to reflect the inclusion of Alexion. AstraZeneca is on track to deliver top-tier revenue growth. With earnings accretion from the deal, AstraZeneca's P/E multiple moves in line with the peer group average – at 17.2x 2022E earnings. The long-term valuation is compelling, with an EV/NPV of 0.79x versus the sector average of 0.94x," concluded the analysts.