The $74 billion, England-based drug manufacturer AstraZeneca PLC (AZN, Financial) recently suffered a 16% drop in its market value after reporting its Mystic study found two injectable immunotherapy drugs were no more effective at shrinking tumors in patients with advanced lung cancer than chemotherapy.
Meanwhile, AstraZeneca also reported its first-half 2017 results. The pharmaceutical company experienced a (-)10.8% year-over-year decline in revenue to $10.5 billion and a contrasting 58% rise in profits to $1 billion.
As observed, research and development declined by $143 million. Selling, general and administrative expenses fell $966 million, helping improve AstraZeneca’s bottom line.
Guidance
In a press release, CEO Pascal Soriot commented on the company's performance.
“Our performance in the first half was in line with expectations as we experience the loss of exclusivity of Crestor and Seroquel XR in the US. We continued to deliver transformative science across the pipeline, particularly in Oncology. Imfinzi was launched in bladder cancer while we published practice-changing data in breast cancer for Lynparza, our first-in-class PARP inhibitor. In lung cancer, we strengthened our unique portfolio focused on both the genetic drivers of disease and immunotherapy. In the first half, we shared positive results for Imfinzi in the PACIFIC trial and reported more encouraging data for Tagrisso in patients with central nervous system metastases."
“I’m excited about our pipeline-driven transformation as we continue to deliver for shareholders on our strategy to return to sustainable long-term growth. In a pivotal year for AstraZeneca, we remain focused on realising the potential of our pipeline, growing our new launch medicines and bringing our strong science to patients.”
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Valuations
AstraZeneca is undervalued compared to its peers. According to GuruFocus data, the company has a trailing price-earnings (P/E) ratio of 18.6 times versus the industry median of 26.9 times, a price-book (P/B) ratio of 5.3 times versus 2.8 times and a price-sales (P/S) ratio 3.3 times versus 3 times.
The pharmaceutical company also had a 4.6% trailing dividend yield with a 92% payout ratio.
Average 2017 revenue and earnings per share estimates indicated forward multiples of 3.4 times and 8.2 times.
Total returns
Despite the recent decline in share price, AstraZeneca still outperformed the broader S&P 500 index with 14.3% versus 11.7%.
AstraZeneca
According to filings, AstraZeneca was incorporated in England and Wales on June 17,1992 under the Companies Act of 1985.
The company was formed when the pharmaceutical, agrochemical and specialty chemical businesses of Imperial Chemical Industries PLC were spun off in 1993. In 1999, the company sold the specialty chemical business. Also in 1999, AstraZeneca merged with Astra of Sweden. In 2000, it divested the agrochemical business and merged it with a similar business of Novartis (NVS, Financial) to form a new company called Syngenta AG (SYT, Financial).
Without adjustments and eliminations, AstraZeneca generated 33% of its revenue in the Americas (Canada and the United States), 25.4% in Europe, 24.5% in the United Kingdom and 17% in Asia, Africa and Australia.
According to filings, the company is engaged in the single business activity of biopharmaceuticals and does not have multiple operating segments. Nonetheless, revenue is derived from several pharmaceutical products.
As of the recent half, AstraZeneca generated 36% of its revenue in products under its cardiovascular and metabolic diseases portfolio, 23% in respiratory drugs, 21% in other disease areas and 19% in oncology (cancer) drugs.
In review, all the different pharmaceutical groups actually exhibited decline in revenue despite the company's overall 18% year-over-year growth in revenue.
In the prior-year filing, AstraZeneca identified the total respiratory and autoimmunity segment as its now respiratory segment, while total infection and neuroscience products are now other disease areas.
In the first half, two of AstraZeneca’s three products that deliver at least $2 billion to $3.5 billion in annual revenue declined in sales. The company’s respiratory drug, Symbicort, showed a (-)10.9% year-over-year decline in sales to $1.38 billion; sales for the cardiovascular and metabolic disease drug Crestor fell more than (-)42.8% to $1.19 billion; and the gastroesophageal reflux product, Nexium, grew 3% year over year to $1.06 billion.
According to filings, Symbicort’s patent expiration ranges from 2017 to 2029 globally; Nexium from 2018 to 2020; and Crestor from 2017 to 2023.
Nonetheless, AstraZeneca does have several other products that continuously generated growth, including Tagrisso (non-small cell lung cancer drug at $403 million in first half), Lynparza (18% year-over-year growth to $116 million; advanced ovarian cancer), Faslodex (15% growth to $462 million; breast cancer drug), Brilinta (26% growth to $496 million; blood thinner) and Farxiga (22% growth to $457 million; type 2 diabetes medication), among other drugs.
Sales and profits
Over the past three years, AstraZeneca had an average revenue decline of (-)3.64%, a profit growth average of 11% and a profit margin average of 10.5%.
Cash, debt and book value
As of June, AstraZeneca had $5.2 billion in cash and cash equivalents and $19.7 billion in debt with a debt-equity ratio 1.44 times compared to 1.3 times in the same period last year. Overall debt rose by $2.1 billion while equity increased by $123 million.
Of AstraZeneca’s $65 billion iin assets, 60.3% were intangibles and goodwill while book value grew 0.1% year over year to $15.4 billion.
Cash flow
In the first half of the year, the company witnessed a (-)75% year-over-year decline in cash flow from operations to $338 million. As observed, the company had higher cash outflow in relation to its working capital and short-term provisions and non-cash and other movements.
Capital expenditures were $716 million, leaving AstraZeneca with (-)$378 million in free cash outflow compared to $67 million in the prior-year period. Despite having cash outflows, the company still provided $2.37 billion in dividends and raised $2.55 billion in debt net repayments.
The cash flow summary
Over the past three years, AstraZeneca allocated $7.85 billion to capital expenditures, raised $7 billion in debt net repayments and $369 million in share issuances, generated $6.67 billion in free cash flow and provided $10.6 billion in dividends on an average free cash flow payout ratio 309%.
Conclusion
Despite the disappointing results from the company’s Mystic trial, AstraZeneca’s first-half 2017 performance indicated weak business growth albeit better cost management, resulting in higher profits year over year.
Further, a couple of the company’s high revenue-generating drugs also exhibited significant sales declines in recent months, which were not replaced by other drugs that are still growing.
The company also has a leveraged balance sheet accompanied by a good amount of blue sky elements (goodwill and intangibles) at 60%. Meanwhile, AstraZeneca has been overly generous to its shareholders with an average payout ratio of 309%.
Analysts have an average price target of $34.87 a share versus $30.27 at the time of writing. Applying three-year revenue growth and P/S averages followed by a 25% margin provided a price of $22.2 per share.
In summary, AstraZeneca is a pass.
Disclosure: I do not have shares in any of the companies mentioned.
