AstraZeneca (AZN, Financial) is one of the world's largest pharmaceutical companies, focused on developing medicines and vaccines to combat cancer, cardiovascular, rare, respiratory, and autoimmune diseases.
Investment thesis
On November 9, 2023, the company released financial results for the third quarter of 2023 that exceeded our expectations. AstraZeneca's revenue was approximately $11.49 billion, up 4.6% from Q3 2022 and beating our expectations by $40 million, thanks to stronger sales of Breztri, Tagrisso, Farxiga, and Imfinzi, which minimized the sharp decline in demand for its COVID-19 products.
So, one of the company's key blockbuster drugs is Farxiga, which has been approved by regulatory authorities to, among other things, reduce the risk of cardiovascular death and the risk of hospitalization for heart failure in certain patients with type 2 diabetes. Its sales were approximately $1.55 billion for the three months ended September 30, 2023, up 41.1% year-on-year due to its strong efficacy, which also contributed to its relatively rapid increase in its share of the global SGLT2 inhibitor treatment market.
Author's elaboration, based on quarterly securities reports
At the same time, Q3 Non-GAAP EPS amounted to $0.87, which is $0.05 more than analysts' consensus estimates. Moreover, the company's management raised its financial guidance for FY 2023 and expects its Core EPS to increase by a low double-digit to low-teens percentage even as competition in the global oncology drugs market intensifies, including due to label expansions of Merck's Keytruda (MRK, Financial) and Bristol Myers Squibb's Opdivo (BMY, Financial).
We expect AstraZeneca's EPS growth to continue into 2024, thanks in part to its effective R&D policy, which allows it to discover experimental drugs with mechanisms of action that are universal to treat various diseases. As a result, the company's approach ensures higher rates of label expansion for its medicines relative to its competitors. It also helps reduce their development time, which is especially important in the pharmaceutical industry because of the restricted duration of drug patents.
For example, one such AstraZeneca product is Enhertu (trastuzumab deruxtecan), which was developed jointly with Daiichi Sankyo and is used to treat certain patients with non-small cell lung cancer, breast cancer, and stomach cancer.
Author's elaboration, based on based on AstraZeneca press releases
As you can see from the table above, the number of indications for the use of Enhertu has been growing at a significant pace in recent years. Ultimately, this continues to positively impact its sales, which totaled approximately $1.84 billion in the first nine months of 2023, an increase of 145.9% compared to the same period in 2022.
Author's elaboration, based on quarterly securities reports
In addition, it is important to note that thanks to the growing demand for AstraZeneca's key products, the launch of new drugs, and lower inflation, the company's gross margin not only continues to grow year after year but also outperforms its competitors in the pharmaceutical industry such as Merck (MRK, Financial), Sanofi (SNY, Financial), GSK (GSK, Financial), and Roche Holding (RHHBY).
Author's elaboration, based on Seeking Alpha
AstraZeneca's Q3 2023 financial results and outlook for the 2H 2023
We estimate that the company's results for the third quarter of 2023 were quite good, excluding the decline in sales of Vaxzevria, which is a vaccine for preventing COVID-19, and lower demand for its COVID-19 monoclonal antibodies. The decrease in demand for COVID-19 products was due to the end of government contracts for their supply and also a drop in their efficacy in combating new variants.
On the other hand, AstraZeneca's revenue continues to grow year over year and quarter over quarter. The financial metric beat analysts' consensus estimates in eight of the last ten quarters, primarily driven by rising sales of oncology products and medicines aimed at combating cardiovascular, renal, and metabolic diseases (CVRM).
What's more, the company pleased investors with regulatory approvals for its drugs and that its product candidates met primary endpoints in Phase 3 clinical trials, which will support continued revenue growth in the future.
Author's elaboration, based on quarterly securities reports
The British-Swedish pharmaceutical company is expected to release its fourth quarter 2023 financial report on February 8, 2024. According to Seeking Alpha, AstraZeneca's revenue for the quarter is expected to be $11.6-$12.27 billion, up 3.5% from analysts' expectations for the previous quarter.
Author's elaboration, based on Seeking Alpha
Furthermore, under our model, the company's total revenue will be in this range and reach $11.9 billion. AstraZeneca's quarterly revenue increase will be driven primarily by continued double-digit sales growth in its Oncology, CVRM, and Rare Disease business units.
Created by author
After the acquisition of Alexion Pharmaceuticals in 2020, AstraZeneca's operating income margin continues to grow and, according to our estimates, will reach 23.5% for 2023, increasing by 3.3% compared to the previous year. Simultaneously, this financial indicator will rise slightly to 24.6% by 2024, mainly due to lower inflation and increased sales of Calquence, Farxiga, Enhertu, and Ultomiris.
According to Seeking Alpha, AstraZeneca's fourth-quarter EPS is expected to be $0.69-$0.87, slightly less than the consensus estimate for the third quarter of 2023. At the same time, we expect its EPS to be above the median of this range and reach $0.81.
Besides, the Non-GAAP P/E [FWD] is 17.36x, which is 9.59% lower than the average over the past five years, which is one of the factors indicating that the company is slightly undervalued by Mr. Market, even despite the relatively high pace of launching next-generation medicines.
Also, unlike many pharmaceutical companies with market capitalization exceeding $100 billion, AstraZeneca's total debt/EBITDA ratio has continued to decline significantly over the past three years, reaching 1.58x over the past 12 months. The key reason for the improvement of this financial indicator is the year-on-year growth of the company's EBITDA.
Author's elaboration, based on Seeking Alpha
We believe AstraZeneca will not have significant difficulty repaying its senior notes maturing between 2024 and 2051, thanks to its growing free cash flow, rising demand for its drugs, and no need to pursue an aggressive M&A policy. The absence of an immediate necessity for an active M&A policy is primarily because most of the company's crucial medicines will lose exclusivity only after at least eight years.
Conclusion
AstraZeneca is one of the world's largest pharmaceutical companies, focused on developing medicines and vaccines to combat cancer, cardiovascular, rare, respiratory, and autoimmune diseases.
However, increased competition in the global lung cancer therapeutics market and the negative impact of the Inflation Reduction Act are two key risks that financial market participants need to consider. According to our estimates, these two factors have been the key reason for the fall in AstraZeneca's share price by more than 7% since the beginning of 2023.
Author's elaboration, based on Seeking Alpha
On the other hand, the company's growing operating income margin, high sales growth rates of its blockbusters such as Imfinzi, Calquence, Farxiga, and Ultomiris, its relatively low total debt/EBITDA ratio, and its leading position in the global cancer therapeutics market are key investment theses that make AstraZeneca an attractive asset for long-term investors.
We continue our analytics coverage of AstraZeneca with an "outperform" rating for the next 12 months.
