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AstraZeneca to Justify its Current Price in the Long Term

Constantin Wells (University of St. Gallen), Ory Ratoviz (Cal Poly SLO - Orfalea College of Business), Spyros Maris (University of Glasgow), Luca Poschl (University of St. Gallen), Alvaro Bernal (King's College London)

Company Profile:

AstraZeneca PLC is a Swedish-British multinational pharmaceutical and biopharmaceutical company founded on April 6, 1999, through the merger of Sweden-based AstraAB and UK-based Zeneca PLC. Its global headquarters are based in Cambridge, United Kingdom. AstraZeneca (AZN) is a holding company, which engages in research, development, and manufacturing of pharmaceutical products. The company has been working extensively in therapy areas such as oncology, cardiovascular, renal, metabolism, and respiratory. Approximately, 80% of the firm’s shareholders are individuals.

  • The company falls under the sector of Healthcare Technology and under the Pharmaceutical Industry.

  • The company’s market capitalization is approximately USD 136.3 B.

  • As of 2019, the total number of employees employed by the company were approximately 70.6 K.

  • The company has manufacturing facilities in 19 different companies, 9 operating research and development sites and sales across 100+ countries worldwide.

  • Some of the most sold products of the company include Losec (marketed as Prilosec in the USA) and Seloken, - a leading cardiovascular beta-blocker.

Over the past three years AZN has completed over 150 strategically important business development transactions and the following are some of the groundbreaking transactions:

Daiichi Sankyo: AZN entered an alliance with Daichii Sankyo to develop and commercialize Enhertu for multiple cancer types. In markets where Daiichi Sankyo is selling this product, AZN is entitled to receive a royalty and this income is recognized as Collaboration revenue.

Innate Pharma: In 2018, AZN entered into a further multi-element transaction with Innate Pharma. Under this agreement, AZN decided to pay USD 50 million to collaborate on, and acquire an option to license IPH5201. Also, AZN licensed the EU and US rights to Lumoxiti to Innate Pharma for USD 50 million upfront alongside future milestone payments of up to USD 25 million.

Company Snapshot:

Important people, Management/Board of Directors

Pascal Soriot -Executive Director and Chief Executive Officer (MoB since Oct. 2012)

Previous Positions: COO Roche pharmaceuticals division

Education: École Nationale Vétérinaire d’Alfort (doctor of veterinary medicine); HEC Paris (MBA)

Marc Dunoyer - Executive Director and Chief Financial Officer (MoB since Nov. 2013)

Previous Positions: Global Head of Rare Diseases GSK

Education: Paris University (Bachelor of Law); HEC Paris (MBA)

Leif Johansson - Non-Executive Chairman of the Board (Chairman since June 2012)

Previous Positions: CEO AB Volvo, CEO AB Electrolux

Education: Chalmers University of Technology, Gothenburg (MSc in engineering)

Key Suppliers

The pharmaceutical industry is known for its strong reliance on APIs (Active Pharmaceutical Ingredients) and chemical suppliers. Supplier monitoring and management is even more critical for AstraZeneca than for some of its competitors. According to a report published by the European Parliament more than 50% of drugs to treat cancer and disorders of the nervous system account for more than half of those in short supply. Whilst the manufacturing procedure of cancer treatment relevant APIs is affected by tremendous manufacturing problems, industry quotas, legal parallel trades; AZN is a leading example for partnering up with European key suppliers to get away from the industry-standardized dependence on Asian suppliers.

AZN’s key suppliers are:

  • Swedish Orphan Biovitrum AB (Producer of therapeutic products to cure rare diseases)

  • FibroGen Inc (Therapeutics producer)

  • Gerresheimer AG (Producer of glass and plastic packaging)

  • Charles River Lab (Provider of laboratory services and R&D)

  • AptarGroup Inc (Industry-leading dispense systems producer)

  • Ionis Pharmaceuticals Inc (Producer of RNA-targeted therapeutics)

  • Pieris Pharmaceuticals Inc (Producer of immuno-oncology multi-specifics)

Competitive Landscape (Industry/Peer Overview)

Industry Overview

The worldwide pharmaceutical market is currently worth 1,204.8 billion USD. The Pharmaceutical sector is made up of three components: Research firms; the generic drug industry; and the biotech industry. The industry plays a significant role in developing medications and vaccines to reduce the incidence of diseases, to treat diseases, and enhance the quality of life of people.

The industry mostly contributes by engaging in technological advancements through innovative research to meet the healthcare demands of populations. Given huge capital at stake and the pace of technological disruption, the pharma industry is quick to adapt. Leading drug companies are re-investing up to 20.8% of drug sales into new drug development.

However, the pharma industry is known for high barriers to entry, especially in the U.S. but around the world as well. Regulatory organizations heavily regulate this market and regularly influence which drugs enter the market. Bringing new drugs to market costs an average of USD 2.8 billion and over 15 years, which creates an unfavorable environment for start-ups. Further, the global pharmaceutical contract development and manufacturing market is expected to expand at a compound annual growth rate (CAGR) of up to 7.1% in the next 5 years.

  • The S&P 500 Healthcare Index has returned a 1-yr annualised value of 17.45%

  • Some strong performers in the UK, as of 23/10/2020 (YTD) include AstraZeneca “AZN” (9.08%), Moderna “MRNA” (314.64%) and Hikma “HIK” (26.94%)

In the last few years, major pharmaceutical companies have been involved in sizable transactions, taking advantage of synergies to increase their market share and put more products in the market. Most notable examples include Bristol-Myers’ “BMY” USD 87.6 Bn acquisition of Celgene and AbbVie’s “ABBV” USD 83.8 Bn acquisition of Allergan in 2019. The large volume of the recent M&A deal underlines the dynamic nature of the sector. The trend of M&A activity is expected to continue and is an opportunity for AstraZeneca which has been involved in considerable deals and will be elaborated later on in the “Opportunities” section.

Main Competitors

AstraZeneca, being the 7th largest pharmaceutical company by revenue in the world, faces tough competition. Even though the market has many players, many of them operate along the entire supply chain from initial research to the production and manufacture of prescription drugs, which is counterintuitive at first due to their quantity. The sector's rapid growth is expected to continue, reaching a size of USD 1.5 trillion by 2023.

While AstraZeneca does not reach the heights of USD 300bn+ market cap giants like Johnson & Johnson “JNJ” or UnitedHealth Group “UNH” yet, it is not entirely fair to compare them to each other, as their approaches differ. Spending more than 20% of revenue on research and development (R&D), which is one of the key metrics in pharma, reaffirms the science-led and innovation-driven approach of AstraZeneca, which ranks them in the middle of their competitors in the sector. The large downside of this strategy however is the low net profit margin with roughly 8%, compared to rivals such as Amgen “AMGN” or Biogen “BIIB”, achieving more than 30% respectively.

The obvious outlier, in this case, is Gilead Sciences “GILD”, which spends nearly 40% on R&D, posing a rising threat to AstraZeneca once profitability is obtained, as Gilead operates in all of AstraZeneca’s focal sectors.

Oncology, which aims to produce cancer or hormonal therapy drugs, is a market expected to be worth more than USD 200bn in 2023, according to marketresearchreports. It was responsible for 37% of AstraZeneca’s sales in 2019 ranking them 8th in the industry, recording less than a quarter of market-dominating Roche’s revenue. Roche’s dominance through is expected to be challenged as a result of the 2019 acquisition of currently 2nd-placed Celgene by Bristol-Myers Squibb. As a result of fierce competition, AstraZeneca may face troubles to expand its current market share of 7%. The firm's growth potential mainly relies upon the Asia-Pacific region, with its predicted CAGR of 10% until 2025, potentially strengthening its focal region.

Cardiovascular, Renal, and Metabolism (CVRM), accounting for 29% of AstraZeneca’s 2019 revenue, is a market currently worth nearly USD 195bn, led by Sanofi, Bayer and Bristol-Myers Squibb, achieving more than twice as much revenue as AstraZeneca. AstraZeneca’s China expansion is currently the carthorse of its future growth expectations, aiming to provide 200 tertiary and secondary hospitals there with multi-year cardiovascular clinical programs, with the hope of expanding its market share of 3.6%.

Respiratory, which is a fragmented market, given that no big player really focuses on it apart from GlaxoSmithKline “GSK”, accounts for 23% of AstraZeneca’s total revenue, mainly achieved by Symbicort’s USD 2.5bn in sales. This leaves AstraZeneca sitting in 2nd place far behind GSK and above Roche “RHHBY” in product sales, holding 7.7% of the market. The industry however may face changes in the near future, given that it is likely to see new combinations and devices in the form of branded or generic products, which tests the efficiency of AstraZeneca’s high R&D spending in order to help patients suffering from asthma among other diseases.

The remaining 11% of AstraZeneca’s revenue are scattered amongst other markets, underlining its clear focus on three segments.

Industry Trends

What are the key trends within the sector and how do they affect the competitiveness of the target relative to the overall competition?

Several trends are reshaping the ever-changing pharmaceutical industry and may cause challenges for pharma companies in the future.

Drug-pricing concerns will exacerbate

There are fears about drug overcharging for generic drugs which is influencing international markets including Germany and Japan to establish tighter price controls on newly produced medicine. Pricing strategies depend on the company: big pharma players like Novo Nordisk and Eli Lilly are committed to voluntary price restraints while companies like Novartis and Roche favor value-based pricing. The need to be transparent with pricing is increasing given the trend of price overcharging.

This is especially the case given increased public scrutiny on the price and accessibility of pharmaceuticals worldwide; the potential of such concerns possibly amounting to the dismantling of long-standing pricing models such as Roche’s and other drug developers. The most cost-conscious companies will be those who increasingly outsource the production process of their products (excluding sales and research & development) to partners, thereby producing more alliances between packaging, transportation and contract manufacturing providers.

The conflicts surrounding prices charged for pharmaceuticals has most recently been demonstrated through biopharmaceutical companies such as Moderna. They predicted to hold the price of their coronavirus vaccine doses approximately USD 37 per dose. This is compared to the average priced vaccine likely to be charged by companies such as Johnson & Johnson and AstraZeneca pricing at USD 10 and USD 3- 4 a dose respectively.

Figure 1: Increasing Prescription Drug Costs (PGPF)

The Use of Artificial Intelligence

The adoption of artificial intelligence by the pharma industry is on the rise in all phases of drug discovery and development from assisting in target identification, predicting new drug properties and identifying risks. Combined with its use in clinical trials, more pharmaceutical start-ups are using AI to work on small molecule drug discovery programs which big pharma companies can take advantage of through partnerships, enhancing the industry’s innovation potential.

A key example is Atomwise, a company who is using its algorithm to perform drug research in developing a treatment for Ebola infections. The algorithm successfully predicted two drugs which could reduce the rate of infectivity; a process simplified and improved through the use of AI.

Technological innovation is also increasingly significant in the drug supply chain aspects of the industry in order to facilitate high tech distribution. AI can not only reduce the drug designing time, saving cost and time, but also reduce the length of the production cycle in order for drugs to reach patients faster. The use of robotics is further being integrated to shorten the production cycle. Robotics are usually in the form of exoskeletons and assist with manual labor and packaging lines to simplify the manufacturing process.

The landscape of disruption in pharmaceutical manufacturing is likely to draw more attention to the sector, resulting in an expected CAGR of more than 40% until 2025, valuing the healthcare artificial intelligence market at USD 31.3 billion.

Healthcare budgets are facing increasing pressure to the rising incidence of chronic disease

Currently, in countries like the U.S. chronic illnesses makeup over 86% of the USD 3.5 trillion in healthcare expenses annually. This number is increasing as more and more people are projected to suffer from chronic illnesses around the world. Chronic diseases are projected to increase expenses within the healthcare market exponentially, leading to a sort of “health care crisis” with less adequate care and higher costs. With patients and medical professionals relying heavily on prescription drugs, pharma companies are a colossal force in the healthcare industry. Chronic illness creates a significant burden on worldwide healthcare markets, which can have dual effects on pharma companies.

On one hand, it might increase sales or production of certain drugs that combat certain chronic illnesses. On the other hand, it might decrease sales or production as the medical community begins to more strongly embrace preventative medicine, like exercise or meal plans among patients. This would reduce the number of chronic diseases that could be prevented through various preventative services, as well as decrease the expenses associated with rising chronic illnesses. Since a significant proportion of pharmaceutical companies’ sales come from prescription drugs catering to chronic illness, the response to this chronic illness crisis is relevant.

Figure 2: Number of People with Chronic Conditions is Rapidly Increasing (Partnership to Fight Chronic Disease)

Key Success Factors

What are the key factors that drive financial success in the industry?

Research and Development

The development of new drugs, medications, and devices shapes the success of biopharmaceutical companies. Most firms spend around 20% of their sales on R&D because they know the long-term value of these investments, with GILD leading the pack at 39% of their sales in 2019. The company with the best drug wins -- in a world of exponential scientific progress, this process of innovation is one of the most important key success factors in this industry. However, too much R&D spending can be detrimental as too much of the firm’s resources go to this category.

Speed to market

First-mover advantage, an auxiliary of R&D, signifies the importance that firms have to release their drugs the fastest to materialize R&D spendings and secure valuable patents. Without the ability to streamline pharmaceutical companies’ supply chain and infrastructure, investment in innovative medicine is useless in a highly competitive landscape. According to MedicineNet, it takes 12 years on average from drug invention to market launch in the United States; any infrastructural advantage could enable a head start of years against competitors).

External Relationships and Collaboration

Achieving operational efficiency through biopharma collaboration is extremely important in the industry. By creating production and distribution relationships with other firms, pharmaceutical companies can compete better in the market and overcome a myriad of challenges. This allows companies to split costs and share experience in often never-seen-before scenarios, as Inova reports that pharma companies regularly pair to co-produce and co-market their products.

Government Support

Government support through subsidies is a major factor in how pharma companies are able to afford expensive R&D. Other98 reports that between 2010 and 2016, the U.S. government through the NIH has spent over USD 64 billion on research for first-in-class drugs.

Health Regulations and Scrutiny

Biopharmaceutical companies are bound to the strict regulations of the healthcare industry. Health regulations, led by organizations like the FDA, deem the viability and health risks of all new drugs that hope to come to market. These regulations are not always set in stone; many factors could cause more or less leniency when it comes to certain treatments produced by pharmaceutical companies.

Key Multiples

Figure 3: Key Multiples Comparables Analysis

Key Ratios

Figure 4: Key Ratios Comparables Analysis

At first glimpse, AZN seems expensive, and yes, probably due to AZN's over the top growth rates expectations, we find a trading price around the 75th percentile mark of our peer group multiples. Although seeing strong long-term growth rates on consensus estimates, we simply can't get excited about the valuation because of AZN's lack of margins compared to its peers. Not even the R&D spendings can justify the current market price (21.22% of AZN's rev compared to 20.68% industry average). We somehow miss this immense competitive advantage, that would back a GAAP P/E TTM trading multiple of 69x, compared to the peer group median of just 20x (same applies to Enterprise Value multiples).

When shifting focus towards comparable companies, tremendous discrepancies within the correlation of margins, growth rates, and market multiples can be recognized. Whilst AZN has proven its ability to generate notorious revenue and EBITDA growth rates the past year (1Y sales growth: 11.39%; 1Y EBITDA growth: 41.71%), competitors such as Merck, Bristol-Myers, and Abbvie have both: healthy margins and impressive growth rates. Higher multiples should be the result; however, exactly the opposite is the case and the market reflects a brighter future for AZN implied by the high EV/EBIT and EBITDA multiples as well as the P/E ratio.

COVID-19 Vaccine Implications

COVID-19 presents a unique opportunity to large-cap pharmaceutical companies, who can devote significant infrastructure like facilities and distribution channels to developing a vaccine while receiving significant sums of money from financial institutions and governments. Governments are rushing to subsidize the research and development of such a vaccine to bring their countries back to normal. The United States is a prominent example of this -- they pledged billions of dollars to firms in order to expedite the process through the CARES Act (a USD 2.2 trillion dollar stimulus bill) as well as multiple other deals with pharmaceutical companies including AstraZeneca, Moderna, and Pfizer. AstraZeneca received over USD 1.2 billion dollars to support the development of its late-phase AZD1222 vaccine in collaboration with Oxford University, according to Bloomberg.

The FDA is making it easier for pharmaceutical companies to achieve a functional vaccine. The United States even went as far as creating Operation Warp Speed (OWS) to accelerate manufacturing and development of potential vaccines. It is clear that the world is desperate for a successful vaccine, and regulatory organizations are inching towards international immunity. Further, Wall Street Journal published that several drugmakers like Pfizer and Moderna are pledging not to seek government approval until their vaccines are fully safe, marking an important development in the road to a vaccine.

In this particular crisis in which there is so much at stake, we need to help expedite vaccine development as much as we can… the agency is committed to thoroughly and expeditiously evaluating it all,” expressed Peter Marks, M.D., Ph.D., director of the FDA’s Center for Biologics Evaluation and Research.

Worldwide vaccine deals are already in place, with certain countries pre-ordering hundreds of millions of vaccines once they are ready to be supplied. Barron’s revealed that AstraZeneca recently reached a deal with the European Commission to supply over 400 million doses to members of the European Union (EU). Business Wire announced that the United States has reached an agreement with BioNTech and Pfizer to provide up to 600 million doses of their MRNA-based vaccine. Australia and China are also pursuing agreements with pharmaceutical companies to supply the vaccine to their populations.

However, companies that produce successful vaccines may not necessarily bring in record profits. Companies like Johnson & Johnson, AstraZeneca, and Pfizer have pledged to not take a profit from their COVID-19 vaccine revenue. The money brought in from subsidies will be used only to cover the costs of vaccine operations. AstraZeneca’s press release in June affirmed that “[the vaccine] is not anticipated to have any significant impact on the Company’s financial guidance for 2020; costs to manufacture the vaccine are anticipated to be offset by funding by governments.” Similar statements have been made by other major pharmaceutical companies. What seems on the surface to be a phenomenal profit-making opportunity is simply a break-even effort to supply the world with immunity.

It is also important to note that this is simply a pledge -- not only is there a grey area in regards to what constitutes a vaccine cost, but there's also the question of how long the companies will continue their not-for-profit vaccine distribution. After all, these companies exist to pursue profits, which means that a deep-diving analysis of the effects on companies providing a Covid-19 vaccine in the future remains to be seen. While positive image benefits could boost sales, high opportunity costs, regarding high amounts of R&D resources put into Covid-19 research, could cause vaccine-providing pharma companies to fall behind their competitors.


Demographics and Urbanisation

Figure 5 More People Living in Urban Areas

Two main underlying demographic trends are expected to highly increase the demand for medical treatment over the next decades. Firstly, the growth of the world’s population, which is predicted to nearly reach the 10 billion mark in 2050, according to the UN, means that more people will need access to medical treatment. Furthermore, the African population, expected to triple until 2050, largely has access to only primitive treatment, underlining the growing demand for pharma’s offerings in the future. Secondly, the world’s population is ageing, exemplified by the fact that the UN predicts 1 in 6 people being over the age of 65 in 2050, in contrast to 1 in 11 beings of that age now.

Additionally, the megatrend of urbanization, seeing so-called “Megalopolises” emerge, not only poses the great challenge of adapting logistically but also implies increasing metabolic and respiratory disease cases, which have scientifically been proven to relate to urban lifestyle choices and air pollution. While these factors may not be as tangible as the previous trends, a predicted 55% increase in annual cancer cases in 2040 and a predicted 47% increase in diabetes patients in 2045 are closely tied to urbanization. As a result, the pharmaceutical sector naturally has immense potential to expand its offerings to a broader target group and a more health issue-prone population.

Precision Medicine

The rise in demand for personalized medicine offers a lot of opportunities for the pharmaceutical industry. Personalized medicine is when medication is produced based on a patient’s specific diagnosis; genes, lifestyle, and environment. Over the past few decades, improvements in technology and development in Big Data have enabled more precise and customized treatments that increase efficiency, reduce costs, and minimize potential side effects. Furthermore, DaaP (Data as a Platform) opens up the possibility for pharma companies to identify disease trends subsequently exploring avenues for new products, which can potentially open up new revenue streams for those who position themselves correctly.

Precision medicine is mainly set to change the oncology, cardiology, respiratory, and immunology industries. Increasing demographics and urbanization play a big role in the growth of the precision medicine market, as global rising cancer cases open up strong demand for individual personalized treatment (as mentioned above, annual cancer cases are set to increase by 55% until 2040). Oncology is currently the biggest segment for precision medicine and is set to drive the latter’s double digit CAGR growth until 2025 as India and China fuel strong growth in population and cancer cases (mainly due to urbanization). However, research in non-oncology areas is also increasing giving further chances for firms who are more specialized in other diseases.

The difficulty for manufacturers is that smaller amounts of medication are produced per drug, as more variation is needed to meet individual differences. This also requires specialized facilities that are designed to produce smaller quantities of pharmaceuticals at a better quality instead of mass-producing treatments. The implications for pharmaceutical companies is the need to ensure profit maximization while accommodating the demands and healthcare requirements of patients. Therefore, those manufacturers that can successfully implement precision medicine in their product offering, while maintaining a low cost of production will have an opportunity for value creation.

M&A activity

The barriers to entry in the pharmaceutical industry due to the research and manufacturing startup costs have been constantly rising. Combined with the long process and uncertainties of producing and selling new drugs have resulted in a rise of consolidation engulfing the industry as companies strive to thrive and decide to join forces by completing M&A deals. In an August 2019 report, the Government Accountability Office (GAO) found that only 12% of the 2,030 generic drug applications reviewed by the FDA from fiscal years 2015 through 2017 were approved in the first review cycle.

By completing M&A deals, pharmaceuticals can take advantage of cost synergies, combine their expertise and potentially increase their success rate and put more products in the market, which becomes increasingly important given the competitive nature of pharma.

In the last few years, significant M&A deals have been announced including; Bristol-Myers’ USD 87.6 Bn acquisition of Celgene and AbbVie’s USD 83.8 Bn acquisition of Allergan in 2019, which have allowed large pharmaceutical companies to dominate the broader deal landscape in the industry. Let’s not forget that AstraZeneca was created through the merger between the Swedish Astra and the British Zeneca. It was the 4th biggest and the current 16th largest M&A deal in the history of the industry by value. It was worth USD 30.4bn when it was completed in 1998 and $48bn adjusted to inflation today and created the 3rd biggest pharmaceutical company in the world. It was a strategic merger aiming at both organic growth and cost synergies of approximately USD 1.1bn per year.

Indeed, since then AstraZeneca has completed numerous M&A deals including the USD 6.9 Bn deal with Japanese drug maker Daiichi Sankyo to bolster its oncology franchise by sharing the rights for the new drug called DS-8201 in 2019. Moreover, in 2013 and 2015 it strengthened its Cardiovascular portfolio by acquiring Omthera Pharmaceuticals and of ZS Pharma for USD 443m and USD 2.7 bn respectively. Considering how effective M&A transactions have been in the pharmaceutical industry we expect a continuation of the M&A deals in the future.


Supply chain risks

In today's uncertain market environment, it has become even more critical to implement a thorough supply chain strategy and therefore reduce the reliance on essential suppliers and partners. In the last few years, we have seen a trend of vertical integration of raw material manufacturers, mostly driven by M&A (see section 3.3; M&A Activity). Especially in this competitive industry, focusing on SCM has become inevitable to maintain a competitive edge.

COVID-19 has seen the importance of stable and flexible supply chains emerge, backed up by delivery shortages from strategic partners. Possible interruptions in AstraZeneca's supply chain have to be reduced to a bare minimum; otherwise, lost revenue, product shortages, and reputational harm will result. According to AstraZeneca's annual report, necessary management actions include setting up disaster recovery and emergency response plans, as well as the establishment of new manufacturing facilities. These are all the first vital steps to become a more resilient player in this highly competitive industry.

However, it could become a challenge to integrate these actions successfully whilst retaining margins and expected growth. Although the production flexibility of raw materials and APIs is often mentioned as a tremendous supply chain enhancement opportunity for the pharmaceutical industry, it entails an even more significant threat for individual companies. A possible shift in the competitive landscape due to the unsuccessful implementation of supply chain management - resulting in a downwind of margins and growth potential - could lead to a loss in competitive advantages in various product groups. Finally, it will be all about the practical expertise to quickly adapt and integrate a modern and flexible way to navigate from obtaining raw materials to selling to end customers.

Higher costs through regulatory demands

Another threat faced by AstraZeneca is higher costs due to regulatory scrutiny. Bringing medicines to the market is a costly process that requires time, effort and as previously mentioned only a fraction of applications are approved by FDA. A recent study by Jama Network estimated the median capitalized research and development cost per product was USD 985 million. Another research by the Journal of Health Economics found that the costs have been increasing at a real annual rate of 8.5% per annum.

The upcoming elections in the US and the potential election of the democratic candidate Joe Biden will make matters even worse for pharmaceuticals. Extension of the Affordable Care Act will result in higher regulatory scrutiny, higher costs and hence, less profitability for pharmaceutical making it harder for AZN, but even more so for some of their competitors to be profitable, as AZN achieves 33% of revenues in the US, whereas the entire market accounts for 48% of all revenue in pharma.

However, AZN has surpassed the industry norm in recent years, moving from a 4% success rate in molecules progressing from candidate nomination to completion of Phase III trials in 2010, to more than 19% in 2017. This was achieved by identifying five critical ‘success factors’ (right target, right tissue, right safety, right patient, and right commercial), effectively allocating resources and hence, increasing the probabilities of successful developments. The relatively higher success rate showcases that AZN has enough ammunition left in the arsenal to protect itself ahead of tighter profit margins and more legislation.


Brexit poses a threat to pharmaceutical research and manufacturing in the UK due to the fact it may potentially drive up the cost of manufacturing and deter future investment. With 2/3 of medicines used in the UK being imported from the EU, the government has been demanding pharma companies to ramp up emergency supply production in preparation for a no-deal Brexit.

Indeed, AstraZeneca is spending up to EUR 50m on measures including amending transport routes and boosting the stockpiles of medication. Regulation is therefore a key Brexit concern for the pharmaceutical giants. This is increasingly the case given that discussions between the EU and UK regarding mutual recognition of testing of drugs and devices has made little progress. Ensuring trade routes are not interrupted so companies don’t have to continuously stockpile is significant for the pharmaceutical sector to be able to thrive after the UK leaves the EU.

UK also might become less attractive to employees and investors in the sector. If Brexit has far-reaching negative consequences for the economy which affects public services, UK pharma companies including AstraZeneca will face competition for skilled individuals from a European pharmaceutical industry which has been thriving from strong growth, an industry which has more than doubled in size in the last two decades.

Investment Thesis

In the long term, we are bullish on the pharmaceutical sector and on AstraZeneca. Increasing population and urbanization will result in a surge in demand for new medicines. AZN has positioned itself to take advantage of the major catalysts including emerging markets and population growth. However, in the short-term, it is trailing at a very high P/E ratio compared to both its peers and its historic average and the successful development of a Covid vaccine has been priced-in. That is the reason why we came up with an under-weight recommendation for the short term. Therefore, we expect AstraZeneca to under-perform the overall market index in the next 12 months.

Key Catalysts

Amid the Covid-19 pandemic and the technological developments, the pharmaceutical industry is rapidly growing and changing to capitalize on the new opportunities. The structural-demographic factors and urbanization will increase the demand for new medicines. The world population is expected to reach 10 billion in 2050, according to the UN which predicts 1 in 6 people being over the age of 65 in 2050, in contrast to 1 in 11 being of that age now. Moreover, urbanization is leading to increasing metabolic and respiratory disease cases. The aforementioned catalysts could stimulate an increase in revenue and therefore, in AZN’s bottom line-profitability.

Key Debates

However, political uncertainty in the largest markets such as the US and UK could trim AZN’s tight net profit margin of 7.96%. Moreover, costs per New Chemical Entity (NCE) have been rising in the last few years while EPS has declined 77% since 2011 (from 3.66$ to 0.83$). Simultaneously cash on hand is half of what it was 10 years ago (USD 6.15Bn compared to USD 12.55Bn) while long-term debt has risen by 66% from USD 9Bn to 15Bn during the same time. Hence, overall bottom-line profitability and restricted means of covering outstanding liabilities could put AstraZeneca’s financial health at risk.


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