Sunday 21 January 2018

Share watch: Patent cliff problem for Astra Zeneca

John Lynch

Last week was painful for investors. On Monday alone, the FTSE fell 2pc, the German DAX and the French CAC both fell 2.5pc - even US heavyweights like Disney retreated. Since the beginning of 2016 markets have been declining, the weak global economy cited as the reason.

Investors are worried and some have headed for the safety of US and German bonds, gold and defensive stocks like healthcare, utilities and to a lesser extent, telecoms. So, our company this week is a defensive one, the pharma company Astra Zeneca, an Anglo-Swedish outfit and the second-largest drug maker in the UK.

Following the merger in 1926 of Nobel Explosives, British Dyestuffs and Brummer Mond, a new entity, Imperial Chemical Industry (ICI), was formed. It became Britain's corporate giant, which invented everything worth inventing in the '50s and '60s. To avoid being taken over, it spun off its pharma business, Zeneca, only to merge with the Swedish Astra to form Astra Zeneca. (You'd search in vain for traces of the once mighty ICI).

The company is quoted in sterling on the London Stock Exchange but it reports in US dollars. It operates in over 100 countries with 57,000 employees. Almost 9,000 are in research and development and the firm has a market value of £50bn. Astra Zeneca today focuses on pain control, oncology, nervous systems, cardiovascular and gastro intestinal products. For most of last year it was in the news, following takeover talks with Pfizer. A bid was eventually rejected but the talks left a legacy of uncertainty - not to talk about political waves - on two sides of the Atlantic. Sweden got in on the act and the powerful Wallenberg family galvanized the successful resistance to Pfizer's overtures and won the day.

The company's task is to bolster investor confidence. It has purchased a stake in Acerta Pharma, a company focused on blood cancer. This was followed by the acquisition of Japan's Takeda respiratory business and pharma outfits in the US and China. During the year the company issued a blockbusting bond of $6bn, one of the largest dollar bonds issued by a UK- listed company. It's a good guess that the funds raised will be used for fresh acquisitions.

Last year the company had sales of $24.7bn, down from the previous year of $26.5bn, and a long way from $35bn five years ago. That decline was also reflected in the plunging of operating profits from a high of $13bn to $4bn last year. However, market confidence is returning and the share price today stands at £40, just below its record high of £48. Its price to earnings multiple is a high 26, way ahead of its peers Bayer, Roche, Sanofi even GSK. Astra Zeneca is also working on a $2.5bn restructuring programme which includes a reduction of 5,500 in headcount.

A major problem for big pharma companies is the loss in exclusivity of some of its medicines and Astra Zeneca is no different.

This is reflected in the decline in sales and operating profits over the last number of years and the company has signalled the 'patent cliff' could continue. To counter this problem last year the company devoted almost $5bn to R&D.

This reflects the urgency to speed up its late stage drug pipeline. As well as the 'patent cliff' it faces challenging times. Pharma companies face intense pricing, particularly in the established markets as governments try to control healthcare costs.

On the supply side, drug approval difficulties are having an impact. But Astra Zeneca feels its business is changing and is more sustainable, durable and profitable. The share price suggests investors share that hope, but I feel better defensive stocks are available.

Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.

Irish Independent

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