AstraZeneca’s (LSE: AZN) first-half results beat expectations but once the dust surrounding the release died down, analysts started to pick holes in the company’s numbers.
A key figure that attracted analysts’ attention was the level of revenue stemming from Astra’s “externalisation deals”. These deals are part of management’s plan to boost short-term revenue while outsourcing drug development costs to other parties.
However, while Astra’s externalisation deals are boosting figures now, there’s concern that the company is selling off some potentially lucrative treatments at knock-down prices.
Growing sales
Astra reported organic sales of $11.6bn for the first-half of 2015, down 10% year-on-year. Including an additional $800m from externalisation deals, sales only declined 6% year-on-year, which is a significant improvement.
Astra has been busy offloading non-core drugs this year. Some of the assets divested include an experimental dementia drug, which was placed into a partnership with Eli Lilly of the US, co-marketing rights for a new constipation pill sold to Daiichi Sankyo of Japan for $200m, and all non-US rights for Entocort, a treatment for Crohn’s disease.
Other larger externalisation deals include a $450m collaboration on immunotherapies with Celgene, one of the biggest names in the US biotech industry.
City analysts believe that these deals are misleading shareholders. They have been called fill-the-gap revenue deals of “questionable sustainability.” Moreover, Astra’s management has been accused of engineering earnings by using these deals to help the group meet lofty growth targets.
Still, there’s no denying that Astra’s turnaround is taking shape. Indeed, while some analysts may be sceptical about the sustainability of the company’s revenue growth, group costs are falling, and Astra has an exciting pipeline of new treatments under development.
The group is expecting to receive the approval for two new drugs — Iressa (lung cancer) and Faslodex (breast cancer) — during the second half of 2015. Regulatory submissions for new lung cancer and ovarian tumours medication is also expected.
But the most exciting drug Astra has under development at present is AZD9291.
Exciting prospects
AZD9291, which is yet to receive a proper name, is being pushed through the development pipeline at breakneck speed. The drug is designed for the treatment for lung cancer and has been undergoing clinical tests for two years. Astra has already submitted AZD9291 for regulatory approval, and if approved, the treatment could catapult Astra’s sales higher.
All in all, Astra has more than 50 treatment trials planned for this year, with several launches planned between now and 2017. According to City analysts, three of these treatments have the potential to be blockbusters, which can return the company to growth by 2017; as targeted by management.
Astra is expected to generate $6.9bn of oncology franchise sales by 2023, up from a low of $2.8bn reported this year. Profit margins are expected to expand significantly over this period. In total, Astra has 222 new products under development.
Paid to wait
It will take time for Astra to return to growth, but the company is one of the FTSE 100’s dividend champions, and investors will be paid to wait.
At present, Astra supports an attractive dividend yield of 4.2%, and this payout should be here to stay, as it is linked to management compensation.
