AstraZeneca sees return to growth as new drugs perform
AstraZeneca said it was on track for product sales to return to growth after the drug company reported strong growth for its new medicines in the first half.
Operating profit in the six months to the end of June fell 21% to $1.46bn as revenue dropped 5% at constant exchange rates to $10.3bn. Product sales at constant currency fell 2% to £10bn, the FTSE 100 company said.
Sales of new medicines rose 69% at constant currency, adding more than $1bn. Cancer drug sales rose 37% at constant currency, including a more than doubling of sales for Lynparza, which treats ovarian and breast cancer.
AstraZeneca is pinning its hopes on new treatments to revive sales, offsetting declines in sales of its Crestor cholesterol treatment which faces generic competition in Europe and Japan.
Pascal Soriot, AstraZeneca’s chief executive, said: "The performance in the first half demonstrated that we remain firmly on track to return our company to product sales growth in 2018. Our new medicines performed strongly … AstraZeneca's rich pipeline and sharp commercial focus make us confident that we have in place the right conditions for our return to growth this year."
AstraZeneca said it expected a low single-digit increase in annual sales at constant currency and that investors should expect “important news flow” from its treatment pipeline beyond the current financial year. The company’s shares rose 2.5% to £56.99.5 at 09:56 BST.
Analyst George Salmon at Hargreaves Lansdown said it was a case of "out with the old, in with the new", with the end of exclusivity on blockbuster anti-cholesterol drug Crestor causing big falls in sales revenue but new drugs coming through but having struggled to fill that multi-billion dollar void.
"However, we’re finally getting closer to the point where new treatments like Lynparza and Tagrisso pick up the slack. Encouragingly for investors, these new drugs are still some way shy of their potential, and the pipeline is packed with prospective blockbusters too.
"Nonetheless, significantly higher shareholder returns are probably some way off. That’s because Astra decided to hold the dividend steady in these last few years despite the payment not being covered by cash coming in. It managed to do that, but only by taking on extra debts.
"While investors have enjoyed a smooth income flow, the extra strain on the balance sheet means the group probably won’t increase the dividend for a while, despite sales and profits looking set to rise again soon.”
Andy Smith, analyst at Edison Investment Research, said if these half-year results were meant to be the turning point after revenue and adjusted EPS declines since 2014 and 2015 respectively, "they hid it well".
"Not helping AstraZeneca's cause was a 53% decline in externalisation revenue (aka selling the family silver) as they have probably reached the end of the barrel of product rights that other companies might want to acquire. In that respect, AstraZeneca have reached a turning point as the years of substituting sales of product rights for organic product sales growth comes to an end," Smith said.
He said the contribution of $1bn of additional sales from new products "may not be enough to achieve the promised return to product sales growth in 2018", with antibody Imfinzi "late to the party in immuno-oncology and the early anti-PD1 antibodies from Merck and BMS are already blockbusters, approved in larger indications".
Broker Shore Capital's Adam Barker said the results were ahead of expectations on core EPS and product sales 1% ahead of consensus.
"As anticipated, there was a significant year on year (+12%) increase in S,G&A investment (as observed in Q1), as AstraZeneca (sensibly in our view) makes investments to increase the chance of successful commercialisation having navigated a number of clinical readouts. Importantly, that increased investment is translating into new medicines performance, with consensus beating expectations for the majority of the launches and Astra anticipating a return to product sales growth in the second half."
ShoreCap noted that AZN shares trade at a premium to the sector on circa 18-19 times 2019 earnings versus peers on circa 15-16, which "reflects Astra’s superior double-digit EPS compound annual growth rate, largely driven by a de-risked pipeline and a number of new product launches, and we have seen further evidence of sustained commercial momentum in the second quarter".
Analyst Barker sees a number of high-risk clinical data readouts over 2018 which "could offer upside to the shares".