Morning Note: Market news and an update from AstraZeneca.

Market News

The Federal Reserve’s Loretta Mester said she wouldn’t think three reductions would still be appropriate for this year. Philip Jefferson found April inflation data encouraging, while Mary Daly told Axios she sees no evidence suggesting a rate hike is needed. The 10-year Treasury yield moved up to 4.45%, while gold slipped from yesterday’s record high to $2,415 an ounce. China gold imports slumped last month to 136 tons, a 30% decline from March and the lowest total for the year.

US equity markets moved higher last night – S&P 500 (+0.1%), Nasdaq (+0.7% to a record high). Palo Alto Networks fell 9% after hours following the release of a downbeat sales forecast for the current period, renewing concerns about a slowdown in cybersecurity services.

Jamie Dimon said succession plans at JPMorgan are “well on the way” and the 68-year-old’s no longer looking at a five-year horizon. The bank raised its full-year NII forecast and lifted its expense guidance. The shares fell 4.5% after Dimon said the lender isn’t going to buy back a lot of stock.

This morning in Asia, the main indices drifted lower: Nikkei 225 (-0.2%); Hang Seng (-2.1%); Shanghai Composite (-0.4%). The FTSE 100 is currently trading 0.3% lower at 8,397. The FT reports that activist Eminence Capital has built a stake in Reckitt Benckiser.

UK grocery inflation fell to 2.4% in the four weeks to mid-May, the lowest since October 2021. The Bank of England’s Deputy Governor Ben Broadbent said that UK interest rates may drop this summer. Sterling trades at $1.2720 and €1.1705. The oil price is $83 a barrel.

Source: Bloomberg

Company News

Ahead of its Investor Day later this morning, AstraZeneca has released new long-term financial targets. The headline ambition is to achieve revenue of $80bn by 2030. 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 Respiratory & Immunology (R&I), Cardiovascular, Renal, & Metabolic diseases (CVRM), and Vaccines & Immune Therapies (V&I). The $39bn acquisition of Alexion in 2021 transformed the group’s exposure to rare diseases, of which there are over 7,000 known today, with only 500 or so having approved treatments.  Demand for medicines for rare diseases is forecast to grow by a low double-digit percentage. The group’s position in the areas has been further enhanced by the purchase of a portfolio of early-stage rare disease gene therapy programmes and enabling technologies from Pfizer and the acquisition of Amolyt Pharma, which expands the group’s late-stage pipeline and its bone metabolism franchise.

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. In 2023, the company started 27 Phase III trials across 18 medicines for 10 potential blockbuster assets.

Today’s Investor Day is the first in many years and comes after the company delivered its ambitious $45bn revenue goal set a decade ago.

The new ambition to deliver $80bn in revenue by 2030 compares to $45.8bn in 2023. This implies a growth rate of 8.3% p.a., well ahead of the sector’s mid-single digit growth rate.

This will be achieved through significant growth in its existing oncology, biopharmaceuticals, and rare disease portfolio, driven by geographic expansion and follow-on indications from the existing portfolio, as well as new products currently in late-stage development. The group expects to launch 20 new medicines before the end of the decade, an upgrade from the current target to deliver at least 15. The company highlights that many of the products have the potential to generate more than $5bn in peak year revenue.

The company also highlights it will seek to drive sustained growth beyond 2030 by continuing to invest in transformative new technologies and platforms that will shape the future of medicine.

AZ will maintain its strategic commitment to R&D while focusing on productivity throughout the company, driving operating leverage and enabling the delivery of its ambition for a mid-30s percentage core operating margin by 2026, versus the 2023 a margin of 32%. Beyond 2026, the margin will be influenced by portfolio evolution and the company will target at least the mid-30s percentage range.

During the day, the group will host a tour of its state-of-the-art Discovery Centre and give detailed presentations on its biopharmaceuticals, rare disease, and oncology divisions, outlining the key products expected to drive revenue growth to 2030.

As a reminder, AZ has a robust balance sheet and generates strong free cash flow. The company is committed to a progressive dividend policy, intending to maintain or grow the payout each year.  Underlining the company’s confidence in its performance and cash generation, the 2024 dividend indication is $3.10, up 7%, equating to a 2% yield at the current share price and exchange rate.

The guidance for 2024 is:

-              total revenue is expected to increase by a low double-digit to low teens percentage.

-              Core EPS is expected to increase by low double-digit to low-teens percentage.

We believe the outlook for the pharmaceutical sector remains mixed. Although the business provides some protection against macroeconomic uncertainty and R&D productivity is expected to increase with the help of AI, 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 AZ is well placed 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