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AZN AT A GLANCE

P/E ► 9.07 AVG EV/EBITDA ► 6.05 LOW ROA ► 16.8% AVG ROE ► 40.6% AVG Debt to Equity ► 1.68 HIGH Current Ratio ► 1.36 LOW Interest Coverage Ratio ► 9.82 AVG

 

 

 

 

 

 

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AstraZeneca is one of the world's largest pharmaceutical companies, with FY2008 sales of $31.6 billion and $6.1 billion in profits.^[1] AstraZeneca's wide-ranging portfolio of products includes some of the world's most successful drugs. Among other blockbusters, AstraZeneca produces cholesterol fighter Crestor and the ubiquitous "purple pill" Nexium, one of the best-selling drugs in history.

Analysts credit AstraZeneca with having one of the most diversified drug portfolios in the pharmaceutical industry. AstraZeneca's blockbuster drug Nexium is the industry leader in treating gastrointestinal disorders like heartburn. The company also has a significant presence in cardiovascular therapy with Crestor, neurology with Seroquel, and respiratory treatments with Pulmicort and Symbicort. In all, AstraZeneca has eleven blockbuster drugs (with $1 billion or more in annual sales) in five different therapeutic categories. The strong performance of these drugs has propelled earnings growth in recent years.

Despite sunny short term prospects, AstraZeneca will face serious challenges in the future. Despite substantial R&D spending, the company's development pipeline has failed to produce any extremely promising candidates for future blockbuster drugs. In response to the coming drug drought, AstraZeneca recently acquired MedImmune for $15.6B. Although the acquisition may help to revive AstraZeneca's lackluster pipeline, many investors caution that AstraZeneca paid far too high a price for the company.

Corporate Overview

Based in London, AstraZeneca was formed in 1999 when Astra AB of Sweden merged with Zeneca Group PLC of the UK. The merger produced one of the world's largest pharmaceutical companies, employing 66,000 people in over 100 countries worldwide. In fiscal year 2008, AstraZeneca reported almost $31.6 billion in sales and $6.1 billion in net profit. AstraZeneca's impressive portfolio of drugs includes some of the world's most successful blockbusters. In addition to the ubiquitous "purple pill" heartburn drug Nexium and cholesterol fighter Crestor, AstraZeneca had 10 blockbuster drugs in 2008. All in all, these products generated 78% of the company's revenue in 2008.^[2]

Blockbusters and Major Therapeutic Areas

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The company focuses its pharmaceutical efforts on six basic therapeutic areas: gastrointestinal, cardiovascular, oncology, respiratory and inflammation, neuroscience, and infection.

Gastrointestinal - Prilosec and Nexium AstraZeneca is the market leader in treating gastrointestinal disorders like heartburn and acid reflux. In this therapeutic area, AstraZeneca has produced two of its most successful blockbusters: Prilosec and Nexium. Prilosec was the first in AstraZeneca's line of proton pump inhibitors, which treat acid reflux. Prilosec lost patent protection in 2002 but has remained resilient among strong generic competition, bringing in $1.0 billion in 2008. In response to Prilosec's loss of patent protection, AstraZeneca enhanced and re-branded the drug under the name Nexium. A strong marketing campaign and additional therapeutic benefits has produced strong results for "the new purple pill." Nexium raked in $5.2 billion in FY2006 and is AstraZeneca's top-selling product. ^[4]

^[5]

Cardiovascular - Crestor, Seloken/Toprol-XL & Atacand Cardiovascular disease is the leading cause of death in the world, accounting for over 30% of all human deaths every year. Hypertension, or high blood pressure, is the most common of all cardiovascular diseases, affecting 25% of the world's population; additionally, hypertension is often a precursor of more severe cardiovascular conditions. AstraZeneca has a strong presence in cardiovascular-related pharmaceuticals. Crestor, AstraZeneca's most successful CV drug with $3.6 billion in 2008 sales, treats high cholesterol. AstraZeneca also has two blockbusters targeted at hypertension: Seloken/Toprol-XL recorded sales of $800 million in 2008, while Atacand, a first-line treatment of hypertension had sales of $1.4 billion. ^[6]

Neuroscience - Seroquel AstraZeneca's most successful drug for the treatment of neurological disorders is Seroquel. Seroquel competes in the antipsychotic drug market, and can be used to treat several mental imbalances. Seroquel is used to treat schizophrenia in 87 markets globally and bipolar mania in 73 markets. However, the drug may significantly increase the risk of diabetes.^[7] AstraZeneca is currently facing some 9,000 lawsuits involving 15,000 patients alleging that the company knowingly downplayed weight gain and diabetes risks.^[8] In mid 2008, AstraZeneca won a U.S. patent battle against generics manufacturers, securing its exclusivity to Seroquel until at least 2011.^[9] Sales of the drug were $4.45 billion in 2008. ^[10]

Cancer - Arimidex, Casodex & Zoladex AstraZeneca is also a big player in cancer-related pahrmaceuticals. Cancer is now the second-leading cause of death in the US and Europe after cardiovascular disease. Over 10 million people are diagnosed with cancer every year. AstraZeneca has a strong portfolio of three blockbuster oncology drugs. Arimidex, which had sales growth of 4% last year and $1.86 billion in revenues, is one of the world's most successful breast cancer drugs. Casodex, another blockbuster, treats prostate cancer, which is the most common cancer among American men. Casodex had sales of $1.26 billion in 2008. AstraZeneca's third blockbuster cancer drug Zoladex is approved for use against both breast and prostate cancer and racked $1.14 billion in sales in 2008.

Respiratory - Symbicort & Pulmicort AstraZeneca also has a notable offerings in the treatment of asthma and other respiratory disorders. The company markets two drugs targeted at asthma. The first, Symbicort, achieved 22% growth for sales of $2.0 billion in 2008. The second, Pulmicort, had sales of $1.5 billion in 2008, flat from the year earlier. Symbicort was linked by the FDA to an increase in serious long-term asthma-related side effects. Similar drugs of the same class from other major drug manufacturers were also implicated, making any regulatory action likely unilateral. ^[11]

Business Growth

AstraZeneca reported strong profits in Q2 FY2009 from a year before, posting $1.72B in revenue compared to $1.63B the year before. Sales were flat at $7.96B, as adverse currency movements wiped out a 9% gain on constant currency levels. Sales of Crestor were again strong, rising 33% to $1.13B. Decreased costs also helped, with AZN making a variety of cuts (distribution, R&D, sales.^[12]

In Q3 2009, AstraZeneca reported sales of $8.2 billion, a growth of 10% over the same quarter of 2008 using contant exchange rates (5% using real exchange rates). Revenue was bolstered by increased flu vaccine sales as well as a 14% increase in US sales and a 15% growth in emerging markets. Earnings before tax were $3.61 billion, a 24% increase from the previous year.^[13] The numbers beat analyst estimates and AstraZeneca rose its outlook for the year $6.20-6.40 per share from $5.70-6.00.^[14]

Research and Development

Researching and developing new drugs is the single most important consideration when identifying the prospects of any pharmaceutical company. The process is lengthy and extremely costly. During development phases, researchers and scientists must screen hundreds of thousands of compounds. Out of these hundreds of thousands of compounds only one may be effective for treatment. This process represents the pharmaceutical equivalent of finding a needle in a haystack. The hunt for the next blockbuster drug may take in excess of 10 years and can cost as much as $800 million dollars. A successful drug pipeline is critical for pharmaceutical companies because former blockbusters losing patent protection must be constantly replaced by new viable drugs.

The Pipeline

AstraZeneca's core of highly successful drugs represents one of the youngest and most diversified portfolio in the pharmaceutical industry. Despite this, the firm faces many challenges in the mid to long term: AstraZeneca's prospects after the year 2010 are decidedly dim. Despite a 28% increase in research and development spending in 2007 to $5B and another $5B in 2008, AstraZeneca has failed to produce any truly groundbreaking drugs to complement its robust portfolio. This problem is compounded by several pipeline setbacks afflicting the company: three of AstraZeneca's most promising drugs were stopped in phases II and III testing due to health concerns. When a drug enters phase II, it is determined safe enough for experimental usage amoung a few hundred patients. Phase III testing involves calculating the risk/reward ratio of a potential drug. Prime among these was the blood thinner Exanta which was expected to bolster the company's CV therapeutic division.

One promising drug for AstraZeneca is Brilinta, a late-stage development vascular drug. The compound, also known as ticagrelor, has been shown in a study to have lower death rates than competitor Bristol-Myers Squibb Company (BMY)'s Plavix.^[15]

MedImmune Acquisition

One effective way for pharmaceutical companies to expand or plug holes in their drug portfolios and pipelines is through major acquisitions. In response to dimming increasingly prospects, AstraZeneca acquired MedImmune in 2007 for $15.6B. The most promising aspect of MedImmune's portfolio is its Synagis franchise which is used to protect pre-mature and other high-risk babies during RSV season. Sentiment over the deal has been mixed. While some believe that the acquisition will provide a bridge over troubled waters, others caution that AstraZeneca may have greatly overpaid to snap up the company. ^[16]

Trends & Forces

H1N1 Vaccines

On September 21, 2009, AstraZeneca's MedImmune unit, which manufactures all of its vaccines, announced that the U.S. government had ordered an additional 29 million doses of the H1N1 vaccine. This recent order, brings the grand total of MedImmune H1N1 vaccines on order to 42 million, a cost of about $452 million. The government has currently ordered 251 million doses of H1N1 vaccine from 5 manufacturers.^[17] However, with a population of 300 million people and some people requiring more than 1 dose, more orders may be on the way. MedImmune's ability to capture remaining orders of H1N1 vaccine may significantly affect both its bottom line and its brand presence as a vaccine manufacturer.

Emerging Markets

^[18]

Emerging markets across the globe present another strong growth opportunity for AstraZeneca. As populations in emerging markets such as BRIC (Brazil, Russia, India and China) grow wealthier, they are gaining access to ever more sophisticated health services. As consumers from Russia to China begin to seek treatment from everything from heartburn to high cholesterol, hundreds of millions of these potential customers will turn to AstraZeneca's pharmaceuticals. The sheer size of these population make the emerging markets an incredible opportunity for growth for pharmaceutical companies like AstraZeneca.

Generic Drugs & Patent Protection

For a detailed discussion of brand name vs generic medication, see also Brand name vs Generic medications.

Due to Food and Drug Administration (FDA) regulations, pharmaceutical patents last 17 years in the United States, during which a pharmaceutical company has an exclusive right to manufacture a particular drug. After the patent expires, generic versions of the product can be produced and sold by competitors. Generic medication is cheaper than brand medication, undercutting the pricing power of the original pharmaceutical producer. It is estimated that the loss of patent protection for brand named drugs may reduce sales by up to 90%. Because of the stark decrease in pricing and general revenue generation that occurs with the lost of patent protection, AstraZeneca's business model is highly sensitive to patent protection and the enforcement of intellectual property rights. AstraZeneca has been surprisingly resilient in response to the loss of patent protection in the past. The best example of this came with Prilosec's loss of patent protection in 2002. AstraZeneca responded by rebranding the drug as Nexium, which went on to become the company's best selling drug.

Eight patents on drugs that represent 60 percent of the company's current sales are due to expire in the next eight years. The company also has eight products near the end of its product pipeline and launch. However, it is not clear whether all of these drugs will receive regulatory approval or whether they can replace sales lost to generics.

One of AstraZeneca's largest new products is saxagliptin, a diabetes drug co-developed with Bristol-Myers Squibb. However, even before its launch in 2009, competitor Novartis has developed a drug called Galvus. The two drugs share significantly similarities in chemical structure and pharmaceutical action, so it is unclear how they will fare after launch.

AstraZeneca's Pulmicort was the subject of a patent infringement settlement in late 2008. Israel-based Teva Pharmaceutical Industries had released and been selling a generic version of the drug in the United States, but AstraZeneca threatened with a law suit and successfully forced a settlement. Teva will cease sales of the drug until December 2009, when it will pay AstraZeneca royalties. ^[19]

Unfavorable Legislative Environments

AstraZeneca also faces serious political pressures to increase accessibility to drugs in its two major markets: Europe and the United States. In these two markets, politicians have been pushing aggressively for AstraZeneca to lower drug costs or expand generic licensing. In 2006, European governments such as France and Germany took particularly drastic price reduction measures that adversely affected earnings in these markets. In the United States, legislators have also sought price reductions by giving federal programs such as Medicare and Medicaid increased latitude in its negotiations with pharmaceutical companies.

Outsourcing

Pharmaceutical companies are seeking to cut manufacturing costs by outsourcing drug production overseas. U.S. drug companies already outsource 33% of the $45 billion in total R&D spending.

AstraZeneca has expressed an intent to outsource all of its manufacturing operations within ten years, becoming a purely research and development company. Most of the job cuts announced so far have been in the manufacturing divisions.

Comparison to Competitors

The various aspects of patent protection and the extremely high costs of researching and developing drugs marks the pharmaceutical industry with high risk and high competitiveness. It is important to keep in mind when considering a comparison of industry players that competition does not arise between each company as a whole but rather between specific drug areas and their relative advantages in therapeutic treatment. For example, one of AstraZeneca's more successful blockbusters Crestor, constantly faces competition from the global cholesterol reducing leader Lipitor, produced by Pfizer. In addition to direct competition with peers, AstraZeneca also faces the risk of a decline in sales when peer drugs come off patent (ex. when Lipitor loses patent Crestor will face greater generic challenges.) In short term, AstraZeneca has an advantage over its peers due to its strong positioning in multiple drug markets and relatively young portfolio of drugs. However, in the long term, AstraZeneca lacks the pipeline to maintain this robust portfolio. These facts are reflected in the fact that AstraZeneca has basically matched the unimpressive performance of the S&P 500 Healthcare Index for the past 5 years.

Competition in the pharmaceutical industry lies mostly in specific drug markets. For example, a new diabetes drug is not going to have any effect on an existing cholesterol drug, no matter how successful it is. As a result, financial data on the pharmaceutical companies do not tell the whole story. Instead, it may be more appropriate to analyze Pfizer's competitors by each drug market (See section on Major Drugs and Industry Trends).

Note that Eli Lilly's net income is negative largely due to its acquisition of ImClone for $6.5 billion in October of 2008.^[20]

References

1. ↑ AZN 2008 Annual Report
2. ↑ AZN 2008 Annual Report
3. ↑ AZN 2008 Annual Report
4. ↑ AZN 2008 Annual Report, Pg. 44
5. ↑ AZN 2008 Annual Report
6. ↑ AZN 2008 Annual Report, Pg. 44
7. ↑ http://www.bloomberg.com/apps/news?pid=conewsstory&refer=conews&tkr=AZN%3AUS&sid=aczoMcH1KyQ4
8. ↑ http://www.reuters.com/article/rbssHealthcareNews/idUSN2736387920090227
9. ↑ http://www.reuters.com/article/businessNews/idUKWLA574020080702
10. ↑ AZN 2008 Annual Report, Pg. 44
11. ↑ Dow Jones. "FDA: Long-Acting Asthma Drugs Boost Asthma Risk." 5 December 2008.
12. ↑ AP. "Astra 2Q profit up 6 pct as it cuts costs." 29 July 2009
13. ↑ AstraZeneca PLC Third Quarter & Nine Months Results 2009
14. ↑ Flu helps AstraZeneca lift outlook but market wary
15. ↑ MarketWatch. "Study could boost new Astra-Zeneca drug." 30 Aug, 2009
16. ↑ SeekingAlpha.com. "Astrazeneca's Acquisition of Medimmune Still Looks Overpriced." 30 June 2008.
17. ↑ U.S. orders 29 mln flu vaccine doses from MedImmune
18. ↑ AZN 2008 Annual Report
19. ↑ AstraZeneca, Forbes. "Teva settle generic Pulmicort dispute." 25 Nov 2008.
20. ↑ Lilly to Acquire ImClone Systems in $6.5 Billion Transaction