Morning Note: Market news and updates from AstraZeneca and Under Armour.

Market News

US equity markets were little changed last night – S&P 500 (+0.1%); Nasdaq (+0.1%) – as investors focused on yields and Fed comments. Patrick Harker repeated his view that policymakers should continue to hold rates steady. Jay Powell will speak later at the IMF Conference. The 10-year Treasury yields slipped to 4.49%.

Ken Griffin said higher baseline inflation may last “for decades” and warned that means increased interest rates. The Citadel founder told the Bloomberg New Economy Forum that the US hadn’t counted on higher rates “when we went on the spending spree that created a $33 trillion deficit.”

This morning in Asia, markets were mixed: Nikkei 225 (+1.5%); Hang Seng (-0.2%); Shanghai Composite (flat). The FTSE 100 is currently little changed at 7,390.  Stocks trading ex-dividend this morning include BP (1.24%), HSBC (1.34%), and J Sainsbury (1.46%). Sterling trades at $1.2281 and €1.1470.

China returned to deflation last month, suggesting domestic demand remains sluggish. CPI dropped 0.2% year on year and the slide in PPI deepened, though less than expected. Bloomberg Economics said the data put more pressure on the PBOC to cut its one-year rate next week and trim reserve requirements.

Home rental costs in London showed signs of easing, with demand dropping and signs that tenants are refusing to pay record costs to secure a place to live. Tenant demand across the UK recorded the slowest increase since 2021 in the three months ended in October, according to the latest RICS survey. London was the only region where the balance of respondents reported a decline.

The oil price slipped below $90 a barrel as demand headwinds proliferate – Brent has fallen almost 7% over the previous two sessions. Gold also remains subdued at $1,949 an ounce.

Source: Bloomberg

Company News

AstraZeneca has this morning released strong Q3 results and raised 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 combined 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 approved treatments.  Demand for medicines for rare diseases is forecast to grow by a low double-digit percentage. In the summer, the group also acquired a portfolio of early-stage rare disease gene therapy programmes and enabling technologies from Pfizer. Most recently, earlier in the month, the company accelerated its cell therapy and genomic medicine ambitions through a collaboration and investment agreement with Cellectis.

During the three months to 30 September, the group’s total revenue increased by 6% at constant exchange rates (CER) to $11.5bn, despite a decline of $356m from Covid-19 medicines. Excluding Covid-19 medicines, total revenue increased by 13%.

By therapy area, product sales grew 17% in Oncology, 16% in CVRM, 5% in Respiratory & Immunology, and 14% in Rare Diseases. Vaccines & Immune Therapies fell by 65%, driven by the decline of Covid-19 products. By region, growth excluding Covid-19 medicines was 12% in the US, 16% in Europe, and 10% in Established Rest of World. Emerging Markets sales grew by 16%, within which China was up only 1%.

AZ currently invests more than 20% of sales in R&D and uses partnerships to gain access to innovative technology. This morning, the group has announced an exclusive licence agreement for Eccogene’s ECC5004, an investigational oral once-daily glucagon-like peptide 1 receptor agonist for the treatment of obesity, type-2 diabetes and other cardiometabolic conditions. Eccogene will receive an initial upfront payment of $185m and up to an additional $1.825bn in future clinical, regulatory, and commercial milestones and tiered royalties on product net sales.

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 initiated several Phase III trials of high-potential molecules during the quarter and announced a number of key positive read-outs: datopotamab deruxtecan in metastatic HR positive breast cancer; Imfinzi in liver cancer; and Fasenra in EGPA. Several key regulatory approvals and other milestones were also achieved.

During the quarter, the group’s product gross margin rose by one percentage point to 81.4%, reflecting a positive mix contribution from Rare Disease and Oncology medicines. Core operating expenses remain well controlled, with R&D and SG&A up 5% and 7% respectively. The operating margin grew by one percentage point to 30.8%. Core EPS grew by 9% to $1.73.

Since the start of 2023, net debt has increased slightly from $22.9bn to $23.4bn. AZ is committed to a progressive dividend policy, intending to maintain or grow the payout each year. In September the group paid an interim dividend payout of $0.93, the same as last year.  A similar rate of growth at the full-year stage will generate a 2.3% yield.

Given the strong momentum in the business, the company has raised its full-year guidance:

-          total revenue is expected to increase by a mid-single-digit percentage (previously low-to-mid single-digit), or excluding COVID-19 medicines, by a low-teens percentage (previously low double digit).

-          Core EPS is expected to increase by low double-digit to low-teens percentage (previously high single-digit to low double-digit percentage).

Further out, the group is aiming to 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.

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

Yesterday lunchtime, Under Armour, the sports footwear and apparel company, released results for the second quarter of its financial year to March 2024. Performance exceeded expectations, full-year margin guidance was raised, and the shares rose by 4% in response.

In the three months to 30 September, revenue fell by 0.5% currency neutral terms, to $1.57bn, in line with the consensus forecast. Revenue to wholesale customers fell by 1% to $940m, while direct-to-consumer revenue was up 3% to $596m, driven by a 4% increase in owned and operated store revenue and 2% growth in eCommerce.

Revenue in North America fell by 2% to $991m, while the international business grew by 3% on a currency neutral basis, to $573m (37% of total revenue). By category, apparel grew by 3% to $1.1bn, Footwear was down 7% to $351m, and Accessories increased 3% to $114m.

The gross margin grew 260 basis points to 48.0%, driven primarily by supply chain benefits related to lower freight expenses, partly offset by a channel mix impact related to a normalisation of off-price sales. Selling, general & administrative expenses rose by 2% to leave adjusted EPS up 26% at 24c, well ahead of the market forecast of 21c.

The group has a strong balance sheet and ended the quarter with cash of $656m and no debt. Inventory rose by 6% to $1.1bn. The company is currently buying back its own shares and purchased $50m in the quarter, leaving only $25m of its $500m programme.

The group revised its guidance for FY2024. Revenue is now expected to be down by between 2% and 4% versus the previous expectation of ‘flat to up slightly,’ primarily driven by challenges in North America during the back half of the year. However, because of lower costs, the gross margin is now expected to be up by 100-125 basis points versus the previous expectation of up 25-75 basis points. As a result, the guidance for adjusted diluted EPS is unchanged at $0.47 to $0.51.

We are positive on the overall market, with growth expected to be driven by increased consumer demand for healthier living and the shift to personalised products. Our preferred stock is market leader Nike, which has an attractive brand, and impressive track record of product innovation, and a powerful eCommerce capability.

Source: Bloomberg