BGNE - AstraZeneca's Q2 Earnings Exceed Expectations Astonishing Investors (Rating Upgrade)

2023-07-30 01:20:34 ET

Summary

• AstraZeneca's revenue for the second quarter of 2023 was $11.42 billion, up 5% from the previous quarter and 6% from the second quarter of 2022.
• At the end of June 2023, AstraZeneca's total debt was about $30.8 billion, down $1.68 billion from the previous quarter.
• Calquence's revenue was $653 million in Q2 2023, up 33.55% year-on-year.
• One of the key factors that positively impact AstraZeneca's revenue growth is the active R&D policy implemented under the leadership of Pascal Soriot.
• We continue our analytics coverage of AstraZeneca by upgrading to Outperform from Hold for the next 12 months.

Yesterday , July 28, AstraZeneca (AZN) released its Q2 2023 financial results, which not only beat analysts' expectations but demonstrated that demand for innovative medicines such as Enhertu, Breztri, and Ultomiris is growing faster than many on Wall Street expected. Moreover, sales of blockbusters such as Lynparza and Tagrisso are growing faster than we expected despite increased competition in the global non-small cell lung cancer market.

AstraZeneca's revenue was about $11.42 billion, exceeding our expectations by $0.22 billion. In comparison, Q2 Non-GAAP EPS was $1.08 per share, $0.09 more than we previously forecast . This was mainly due to higher combined sales of Imfinzi and Calquence of $1.73 billion, up 20.7% quarter-on-quarter. As a result, Mr. Market favorably assessed the financial report of AstraZeneca, which was reflected in its price growth of 4.68%.

Over the past six months, AstraZeneca's share price has gained 8.34%, driven by year-on-year operating income margin growth, multiple drug approvals, and positive phase III clinical trial results. As a result, the company outperformed leaders in the global oncology market, such as Pfizer ( PFE ), GSK ( GSK ), and Merck ( MRK ). On the other hand, the S&P 500 ( SPY ) pleased investors significantly more, gaining 13.2% over the same period thanks to a rally in technology stocks.

We continue our analytics coverage of AstraZeneca by upgrading to Outperform from Hold for the next 12 months.

AstraZeneca's Q2 2023 financial results and outlook for the second half of 2023

AstraZeneca's revenue for the second quarter of 2023 was $11.42 billion, up 5% from the previous quarter and 6% from the second quarter of 2022.

Both quarterly and year-on-year revenue growth was driven by sales of Calquence (acalabrutinib), which is a medicine approved for the treatment of patients with chronic lymphocytic leukemia (CLL), small lymphocytic lymphoma (SLL), and mantle cell lymphoma (MCL).

Calquence's revenue was $653 million in Q2 2023, up 33.55% year-on-year. Its sales growth was driven by continued growth in market share of Bruton's tyrosine kinase ((BTK)) inhibitors, thanks to advantages relative to competitors such as AbbVie/Johnson & Johnson's Imbruvica ( JNJ ) and BeiGene's Brukinsa ( BGNE ). Moreover, demand for AstraZeneca's product continues to increase as it is launched in new global markets. So, on March 23, 2023 , Calquence received approval for treating adult patients with MCL in China, which is home to more than 1.41 billion people .

One of the key factors that positively impact AstraZeneca's revenue growth is the active R&D policy implemented under the leadership of Pascal Soriot. Thanks to it, new generation vaccines and drugs appear on the market, which, among other things, can continue to surprise investors by maintaining the company's high margins.

AstraZeneca's R&D spending was $2.67 billion in Q2, or 23.36% of total revenue, which is high in the pharmaceutical industry when many parts of President Biden's Inflation Reduction Act are starting to take effect.

According to Seeking Alpha , AstraZeneca's Q3 2023 revenue is expected to be $11.13-$11.57 billion, up 3.3% from analysts' expectations for Q2 2023. At the same time, under our model, the company's total revenue will be slightly higher than the median value of this range and will amount to $11.45 billion. This will primarily be due to more robust sales of Breztri due to the rapid increase in COPD treatment market share in Japan, Canada, and the US. Overall, the company's drug sales were $163 million in Q2 2023, up 75.3% year-over-year.

On a larger scale, we expect AstraZeneca's product to be able to meet the primary endpoints in the phase 3 clinical trial evaluating its efficacy in treating mild to moderate asthma. In this case, the company will be able to file applications with regulatory authorities as early as the end of 2024, and if this drug is approved, it will significantly increase AstraZeneca's revenue.

AstraZeneca's earnings per share ((EPS)) for the second quarter of 2023 was $1.08, up 25.6% from the previous year. Despite its growth, the company's management left the guideline for 2023 unchanged.

Today, we are reiterating our 2023 total revenue and core EPS guidance. Total revenues are expected to increase by low to mid-single-digit percentage. Excluding COVID-19 total revenue are expected to increase by low double-digit percentage.

According to Seeking Alpha, AstraZeneca's Q3 EPS is expected to be $0.85-$0.98, down 6.2% from the consensus estimate for Q2 2023. While we believe this is slightly underestimated, our model puts AstraZeneca's EPS at $1.

One reason for AstraZeneca's year-on-year increase in operating income is the surge in demand for Enhertu, a medicine used to treat certain types of breast, lung, and stomach cancers. Enhertu's total revenues were $67 million in Q2 2023, an increase of 81.1% QoQ, as it continues to outperform the competition and is impacting its rapid adoption as a new standard of care.

Conclusion

On July 28, AstraZeneca released its Q2 2023 financial results, which not only beat analysts' expectations but demonstrated that demand for innovative medicines such as Enhertu, Breztri, and Ultomiris is growing faster than many on Wall Street expected.

Record rates of R&D spending and Pascal Soriot's effective strategies allow the company to rapidly expand its experimental drug portfolio. As a result, this affects the increase in the share of AstraZeneca's medicines in the global oncology and cardiovascular drugs market.

At the end of June 2023, AstraZeneca's total debt was about $30.8 billion, down $1.68 billion from the previous quarter. Moreover, due to the growth in EBITDA in recent quarters, the total debt/EBITDA ratio fell below 2x, indicating no significant threats to the company's financial position.

We continue our analytics coverage of AstraZeneca by upgrading to Outperform from Hold for the next 12 months.

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