Is AstraZeneca plc Dependent On Debt?

Are debt levels at AstraZeneca plc (LON: AZN) becoming detrimental to its future prospects?

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Patent problems

As with many major pharmaceutical stocks across the globe, AstraZeneca (LSE: AZN) (NYSE: AZN.US) is struggling to rise to the challenge of generic competition. Indeed, many of its key, blockbuster drugs have seen (or are set to see) their patents expire, with profits from those drugs likely to fall as lower cost copycat drugs hoover up demand.

Acquisition spree

A key part of AstraZeneca’s comeback centres on making acquisitions to fill the void left by drugs such as Crestor, a cholesterol medication, which is due to lose patent protection in 2016. For instance, AstraZeneca recently agreed a $2.7 billion deal with Bristol-Myers Squib to take on its share of the two companies’ diabetes alliance. Several other deals have also been signed in the last year and 2014 looks set to include a number of other acquisitions.

However, is AstraZeneca’s financial firepower sufficient for it embark on further acquisitions? Or is it taking too much risk and becoming dependent on debt?

Debt levels

With a debt-to-equity ratio of 43%, AstraZeneca seems to have plenty of scope to increase debt levels. For instance, sector peer GlaxoSmithKline has a debt-to-equity ratio of 233%. Therefore, on a standalone basis (and on a relative basis), AstraZeneca’s balance sheet does not appear to be at all overly leveraged, with the company having only £0.43 of debt for every £1 of net assets.

Debt coverage

In addition, AstraZeneca has an interest coverage ratio of just under 19. This is extremely comfortable, although it must be pointed out that this is likely to fall somewhat over the next couple of years, as profits decline as a result of the aforementioned patent expiries.

However, the decline should not be a major concern and is likely to leave AstraZeneca with considerable headroom when making the payments on its debt. Furthermore, headroom is sufficient to allow more debt to be taken on (and serviced), which should allow the company to continue with its acquisition spree — even while profits fall over the short to medium term.

Looking ahead

Therefore, AstraZeneca appears to have a relatively high degree of financial firepower with which to counter the ‘patent cliff’ it is currently experiencing. This, allied to an encouraging pipeline, mean that shares could experience a strong 2014 and beyond.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

> Peter owns shares in AstraZeneca. The Motley Fool has recommended shares in GlaxoSmithKline.

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