Market news and results from AstraZeneca and L'Oreal.
Market News
The Bank of Japan jolted markets by loosening its grip on bond yields in Kazuo Ueda’s first surprise move since taking the helm. The central bank kept the target for 10-year JGB yields at around 0% but said its 0.5% ceiling was a reference point not a rigid limit. It will manage the curve “flexibly” and will buy 10-year bonds at 1% every business day, effectively capping the yield at that higher level. Only a small minority of economists were expecting a yield curve control tweak at the meeting. Tokyo’s July CPI report showed core price gains slowing to 3%, a tad above consensus. Shares in Japan fell, although they recovered during the session to end down only 0.4%, while the yield on 10-year JGBs surged. The yen gained.
Elsewhere in Asia, markets ended higher (Hang Seng (+1.4%); Shanghai Composite (+1.8%)). US stock futures are up, with the S&P 500 currently expected to open 0.5% higher this afternoon. The FTSE 100 is currently trading 0.2% higher at 7,702, while sterling trades at $1.2784 and €1.1663.
US government bonds sold off after data showed economic growth accelerating in Q2 to 2.4%. Initial state jobless claims fell to a low of 221K last week as the labour market continued to shrug off the Fed’s efforts to squeeze the economy. The 10-year Treasury yield moved above 4%, while gold slipped to $1,950 an ounce. As expected, the ECB lifted interest rates by 25 basis points to 3.75%. German bunds rose and the euro fell back.
UK home sellers are increasingly offering price cuts to tempt cash-strapped buyers into deals, as higher mortgage rates hurt demand. The number of people contacting agents about purchasing a home tumbled by almost a fifth in the past two months, according to Zoopla. The property portal is predicting a 5% drop in house prices this year.
Brent Crude $83.90 a barrel. Saudi Arabia made its first major global mining bet. The kingdom’s PIF and Saudi Arabian Mining are buying a 10% stake in Vale’s base metals unit. Separately, investment firm Engine No. 1 will buy a 3% stake. The total amount to be paid under both agreements is $3.4bn.
Source: Bloomberg
Company News - AstraZeneca
AstraZeneca has this morning released first-half results, which were slightly ahead of market expectations and reiterated its full-year guidance. In response, the shares are up 3% in early trading.
AstraZeneca (AZ) is a global, science-led biopharmaceutical company. The main growth driver has been the group’s key oncology franchises (including Tagrisso, Lynparza, Enhertu, Imfinzi, and Calquence), which have been supplemented by the other ‘growth platforms’ of Emerging Markets, respiratory, and cardiovascular, renal, & metabolic diseases (CVRM). Many of the group’s key products are at early stages in their life cycle – so that it is relatively low risk in terms of loss of patent exclusivity.
The $39bn purchase of Alexion in 2021 combines AZ’s capabilities in precision medicine and its global distribution network with Alexion’s expertise in rare diseases. There are over 7,000 rare diseases known today, and only 500 or so have treatments approved by the US FDA. Demand for medicines for rare diseases is forecast to grow by a low double-digit percentage in the future. In a separate statement this morning, the group has announced a purchase and licence agreement for a portfolio of early-stage rare disease gene therapy programmes and enabling technologies from Pfizer. This furthers Alexion’s ambition in genomic medicine and provides synergistic opportunities across AstraZeneca. The total consideration is up to $1bn, plus tiered royalties on sales.
During the first half of 2023, the group’s total revenue increased by 4% at constant exchange rates (CER) to $22.3bn, despite a decline of $2,181m from Covid-19 medicines. Excluding Covid-19 medicines, total revenue increased by 16%, with product sales increasing 15%.
By therapy area, product sales grew 22% in Oncology, 20% in CVRM, 10% in Respiratory & Immunology, and 12% in Rare Diseases. Vaccines & Immune Therapies fell by 76%, driven by the decline of Covid-19 products. Eight of the group’s medicines delivered more than $1bn of revenue in the first half.
By region, growth excluding Covid-19 medicines was 16% in the US, 13% in Europe, and 8% in Established Rest of World. Emerging Markets sales grew by 22%, within which China was up 9%.
AZ currently invests more than 20% of sales in R&D and uses partnerships to gain access to innovative technology. The group has an attractive pipeline of potential new products, the success or failure of which will be a key determinant of future profitability and the share price. The group is aiming to deliver at least fifteen new medicines before the end of the decade.
Recent news flow on the pipeline, in terms of new data and product approvals, has been encouraging. The company has begun nine Phase III trials since the start of the year and there have been eight positive pivotal trials for Oncology medicines. In the second half of the year, regulatory decisions are expected on nine products and key Phase III data readouts on a further seven.
Earlier in July, the company announced a mixed update on datopotamab deruxtecan, a cancer product being jointly developed with Daiichi Sankyo. In a late-stage trial, the drug was shown to prolong progression-free survival compared with standard chemotherapy in patients whose non-small cell lung cancer had returned after one or two prior treatment attempts. However, the benefits were not as pronounced as hoped and there were some instances of fatalities. AZ said the trial would continue as planned to assess the effect of the drug on overall survival of patients, another important efficacy criterion. The group will proceed to file the data with the US FDA.
The gross margin rose by three percentage points to 82.9% during the first half, reflecting the decline in sales of lower margin Covid‑19 medicines, the cost of production in prior periods, and ongoing mix shift to more speciality medicines. Core operating expenses remain well controlled, with R&D and SG&A up 9% and 8% respectively. The operating margin grew by five percentage points to 36.9%. Core EPS grew by 21% to $4.07.
Since the start of 2023, net debt has increased by 5% to $24.0bn. AZ is committed to a progressive dividend policy, intending to maintain or grow the payout each year. The group has today declared an interim payout of $0.93, the same as last year. A similar rate of growth at the full-year stage will generate a 2.7% yield.
The company has reiterated its guidance for 2023: total revenue is expected to increase by a low-to-mid single-digit percentage, or excluding COVID-19 medicines, by a low double-digit percentage. Core EPS is expected to increase by a high single-digit to low double-digit percentage.
We believe the outlook for the pharmaceutical sector remains mixed. Although the business provides some protection against macroeconomic uncertainty, concerns over drug pricing are likely to remain a headwind especially at a time when governments are looking for ways to reduce debt levels. However, with a pipeline of innovative and rare products to address unmet patient needs, that can justify higher pricing, we believe AstraZeneca is relatively well-placed in this environment with above average revenue and earnings prospects versus the large cap pharma peer group. This has been reflected in the strong long-term performance of the shares.
Source: Bloomberg
Company News - L'Oreal
Last night, L’Oreal released strong first-half results, although the shares are little changed in response this morning.
L’Oreal is a world leader in beauty products, generating annual sales of €38bn across five categories: haircare, hair colour, skincare, fragrances, and make-up. Over the long-term, industry growth is being driven by the expansion of social networks, and with it the social beauty revolution, growth of the emerging market middle class, product premiumisation, and urbanisation.
The group owns a unique portfolio of powerful and complementary brands – including L’Oreal, Lancome, Garnier, and YSL – eight of which have sales above one billion euros. As a result of this, combined with strong product innovation and a cutting-edge digital presence, the group has consistently outperformed the market.
During the first half of 2023, like-for-like (LFL) sales increased by 13.3%. Growth was made up of a 4.9% volume increase and 8.5% growth in value. Progress was well-balanced between offline and online sales. In reported terms, sales grew by 12.0% to €20.6bn, with acquisitions/disposals adding growth of 1.1% and currency movements contributing a 2.4% negative impact.
The group enjoyed broad-based momentum across all divisions. L'Oréal Luxe generated revenue of €3.6bn, up 7.6% in LFL terms, outperforming the luxury fragrance market. In Consumer Products (up 15.0% to €3.9bn) the group achieved record growth with each of its large brands growing in double digits. Dermatological Beauty (up 29.0% to €1.6bn) grew well ahead of the highly dynamic dermo-cosmetics market. Professional Products (up 7.6% to €1.2bn) generated strong growth in salons and haircare. By geography, there was growth in all regions with particularly impressive momentum in Europe (+18.2%), strong performance in North America (+14.7%), and sharp recovery in mainland China in the second quarter.
The operating margin rose by 30 basis points to 20.7%, driving operating profit up by 13.7% to €4.3bn. EPS grew by 11.2% to €6.73. The group has a strong financial position, with net debt ending the half-year at €4.8bn. In response, the group is to initiate a share buyback programme during the second half of up to a maximum of €500m.
Source: Bloomberg