Morning Note: Market news and an acquisition by AstraZeneca.

Market News

US equity markets moved higher last night – S&P 500 (+0.4%); Nasdaq (+0.2%) – with Asia following in a similar vein this morning: Nikkei 225 (+0.2%); Hang Seng (+1.2%); Shanghai Composite (+0.4%). Japan’s wholesale inflation slowed sharply in November as fuel and commodity prices fell. The FTSE 100 is currently trading 0.4% higher at 7,570.

Treasury yields – the 10-year is 4.20% – the and the dollar have slipped back this morning ahead of US economic data and meetings from major central banks that will give fresh clues about the likelihood of interest-rate cuts next year. Headline US consumer prices were probably flat in November from October and CPI growth may have slowed to 3.1% from 3.2% year on year. Core CPI is seen inching up to 0.3% and holding at 4%, respectively. After its recent weakness, gold steadied at $1,986 an ounce.

UK wage growth slowed more than expected in the three months through to October, to 7.2% year on year, versus the forecast of 7.7%. Gilt yields slipped back below 4%, while Sterling trades at $1.2566 and €1.1656.

UK small and medium enterprises (SMEs) are cutting back on investment to get their finances in order, software provider Sage said. Revenues were down 2.5% year on year in the three months to September, though profits held up as costs fell and investment was cut.

The oil price rose to $76.40 a barrel after an attack on a tanker in the Red Sea.

Source: Bloomberg

Company News

AstraZeneca has this morning announced the acquisition of Icosavax, a developer of innovative vaccines for respiratory viruses, for up to $1.1bn. In response, the shares are up 1% 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). The $39bn purchase of Alexion in 2021 combined AZ’s capabilities in precision medicine and its global distribution network with Alexion’s expertise in rare diseases. 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.

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. The group hopes this will generate “industry leading growth beyond 2025”, with industry being 3%-4% growth, and a mid-to-high 30s core operating margin. Growth is expected to be driven by geographic expansion and follow-on indications from the existing portfolio, as well as new products currently in late-stage development.

In addition, the group has traditionally supplemented its growth through M&A, with its strong balance sheet providing financial flexibility.

This morning, AZ has announced the acquisition of Icosavax, a US-based, Nasdaq-listed biopharmaceutical company focused on developing differentiated, high-potential vaccines using an innovative, protein virus-like particle (VLP) platform. Icosavax is leveraging its technology to develop vaccines against infectious diseases, with an initial focus on life-threatening respiratory diseases and a vision for combination and pan-respiratory vaccines.

Icosavax’s lead program (IVX-A12) is a combination vaccine candidate targeting respiratory syncytial virus (RSV) and human metapneumovirus (hMPV). RSV is a common, contagious virus that is a major cause of lower respiratory tract infection in adults. There are currently no treatments or preventative therapies for hMPV and no combination vaccines for RSV. Icosavax’s VX-A12 is the most advanced investigational vaccine targeting both RSV and hMPV.

Icosavax’s pipeline also includes additional candidates that provide optionality as potential components of future combination and pan-respiratory vaccines, including influenza and SARS-CoV-2.

The deal will build on AZ’s expertise in RSV prevention and accelerates its ambition to deliver a portfolio of protective interventions to address high unmet needs in infectious diseases. AZ will acquire all of Icosavax’s outstanding shares for $15 per share in cash, plus a non-tradable contingent value right for up to $5 per share in cash payable upon achievement of a specified regulatory milestone and a sales milestone. The upfront cash portion amounts to $0.8bn, a 43% premium to Icosavax’s closing market price on 11 December. Combined, the upfront and maximum potential contingent value payments represent, if achieved, a transaction value of $1.1bn. Subject to the satisfaction of the conditions in the merger agreement, the acquisition is expected to close in the first quarter of 2024.

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