Morning Note: Market news and an update from AstraZeneca.
Market News
US equities were little changed last night – S&P 500 (+0.1%); Nasdaq (+0.1%) – while the 10-year Treasury yield rose back up to 4.36%. Gold continued its recent drawdown and currently trades at $2,600 an ounce, while Bitcoin hit a new high of $89,000. Brent Crude is $72 a barrel.
In Asia this morning, markets traded lower – Nikkei 225 (-0.4%); Hang Seng (-2.8%); Shanghai Composite (-1.4%) – weighed down by the impact of president-elect Donald Trump’s likely policy agenda and the stronger dollar on regional economies.
There were reports that Trump’s cabinet will include a number of China hawks. Donald Trump is expected to choose Marco Rubio as Secretary of State, a person familiar said, as the president-elect fills his top ranks with loyalists. Another China hawk Mike Waltz is said to have been tapped as national security adviser, while Lee Zeldin will head the EPA.
The FTSE 100 is currently 0.7% lower at 8,058. Vodafone is trading 4% lower despite posting results slightly better than expected. The UK recorded slightly softer pay growth in the three months through to September, while the unemployment rate rose more than expected. In the aftermath of the Budget, insolvency filings rose 64% last week from a year earlier. Sterling trades at $1.2824 and €1.2061.
Source: Bloomberg
Company News
AstraZeneca has today released strong Q3 results and raised its guidance for the full year. The company has also released updates on its R&D programme, a new US investment, and the situation in China. In response, the shares are little changed in a weak overall market.
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 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 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 drive future profitability and the share price.
The group’s ambition is to deliver $80bn of revenue by 2030, up 8.3% p.a. from a 2023 base of $45.8bn. This will be driven by growth in its existing portfolio through geographic expansion and follow-on indications, as well as new products currently in late-stage development, offset by the loss of patent exclusivity in some existing products. The group expects to launch 20 new medicines before the end of the decade, with some products having the potential to generate more than $5bn in peak year revenue. Beyond 2030, the company will seek to drive sustained growth by continuing to invest in transformative new technologies and platforms that will shape the future of medicine. The aim is to generate a mid-30s core operating margin by 2026, versus 32% in 2023. Beyond 2026, the margin will be influenced by portfolio evolution and the company will target at least the mid-30s percentage range.
In the three months to 30 September 2024, the group’s total revenue increased by 21% at constant exchange rates (CER) to $13.6bn, driven by a 20% increase in product sales. This was well ahead of the consensus forecast of $13.1bn and reflected increasing demand for the group’s medicines across the board.
By therapy area, product sales grew 22% in Oncology, 20% in CVRM, 29% in Respiratory & Immunology, and 11% in Rare Diseases.
Core operating expenses remained well controlled, with R&D and SG&A up 24% and 9% respectively.
The operating margin rose by two percentage points to 32%. Core EPS grew by 27% to $2.08, versus the market forecast of $2.04.
Recent news flow on the pipeline in terms of new data and product approvals has been mixed. Most recently, the company issued another disappointing update for datopotamab, which highlighted a miss on the co-primary endpoint of overall survival in the breast cancer setting for the TB01 trial. However, in a separate statement today, the company announced it has submitted a new Biologics License Application (BLA) for accelerated approval in the US for datopotamab for the treatment of adult patients with locally advanced or metastatic epidermal growth factor receptor-mutated (EGFR) non-small cell lung cancer (NSCLC) who have received prior systemic therapies, including an EGFR-directed therapy. The company has also voluntarily withdrawn the BLA in the US for datopotamab for patients with advanced or metastatic nonsquamous NSCLC based on the TROPION-Lung01 Phase III trial. The decisions were made following feedback from the US FDA.
Elsewhere, over recent months, there have been positive read-outs for a number of other research products and product approvals in the US, EU, and China. This morning, the company has announced its Koselugo product showed statistically significant and clinically meaningful objective response rate versus placebo in adults with neurofibromatosis type 1 in global KOMET Phase III trial.
AZ has a robust balance sheet and generates strong free cash flow. At 30 September, net debt stood at $26.3bn, up $3.8bn since the start of the year. The company’s capital allocation priorities include investing in the business and pipeline. To that end, the company has this morning announced $3.5bn of capital investment in the US focused on expanding its research and manufacturing footprint by the end of 2026. This includes $2bn of new investment and probably won’t do the company any harm in the eyes of the new government administration in a market that accounts for 44% of group revenue.
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 2.4% yield at the current share price and exchange rate.
The shares have recently been negatively impacted by events in China. The company has previously disclosed it is aware of a number of individual investigations by the Chinese authorities into current and former AZ. To the best of the company’s knowledge, the investigations include allegations of medical insurance fraud, illegal drug importation, and personal information breaches. Recently Leon Wang, EVP International and AZ China President was detained. The company has not received any notification that it is itself under investigation. The company has said that, if requested, it will fully cooperate with the Chinese authorities.
Given the strong underlying growth momentum, the group has upgraded its guidance for 2024, with both total revenue and Core EPS expected now expected to increase by a high-teens percentage at CER, versus the previous expectation for mid-teens growth.
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 to generate above average revenue and earnings growth. This has been reflected in the strong long-term performance of the shares.
Source: Bloomberg