What's in the Pipeline for AstraZeneca

AstraZeneca's continued strong development of its pipeline is helping the firm mitigate the negative trend of major patent losses

Damien Conover, CFA 7 November, 2014 | 10:59AM
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Aided by delayed generics for gastrointestinal drug Nexium, AstraZeneca (AZN) posted strong third-quarter results ahead of our and consensus expectations. Since the delayed generic competition to Nexium is likely short-lived, generics now expected in 2015, we don't expect any material change to our fair value estimate of £34 based on the results. We continue to see AstraZeneca shares as slightly overvalued with a likely takeover premium still in the stock as Pfizer (PFE) may return to bid for the firm at least at the last offer of £55. As a reminder, our fair value estimate does not include any takeover premium.

Turning to the moat, AstraZeneca's continued strong development of its pipeline is helping the firm mitigate the negative trend of major patent losses. While over the next two years it faces patent loss on Symbicort - 14% of sales, Nexium  - 14% of sales, and Crestor - 21% of sales, the major pipeline advancements should stabilize the top line by 2017.

We believe the most potential lies with recently launched diabetes drug Forxiga. However, we project 2017 total company sales of $23 billion, below management guidance of $25.7 billion as we believe next-generation products will have slower launch trajectories given the increasingly restrictive U.S. payer environment. Further, the increased pricing pressure in the U.S. is weighing on the company's moat as it guided to a 2015 negative single-digit price hit in the U.S., well below the typical mid-single digit price increase.

In the quarter, stagnant growth from the firm's end-of-life-cycle drugs caused total sales to increase 1% year over year (excluding the impact of the restructured diabetes partnership with Bristol). While we expect this trend to continue through 2014, we believe sales will fall in both 2015 and 2016 due to patent losses. However, management has guided to flat 2015 earnings growth, which likely includes several cost cuts to offset the increased generic competition.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
AstraZeneca PLC12,194.00 GBX-0.54Rating
Pfizer Inc29.39 USD-0.71Rating

About Author

Damien Conover, CFA  is an equity analyst and associate director at Morningstar.

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