NVSEF - Is AstraZeneca Overvalued After Publishing Q1 2023 Financial Results?

2023-05-16 16:46:23 ET

Summary

• We continue our analytics coverage of AstraZeneca PLC with a "hold" rating for the next 12 months.
• AstraZeneca's revenue for the first three months of 2023 was $10.88 billion, down 2.9% from the previous quarter and 4.5% from the first quarter of 2022.
• We expect sales of COVID-19 products to bottom out by the second quarter of this year and have a marginal impact on the company's financials from the third quarter.
• On April 27, 2023, AstraZeneca released financial results for the first three months of 2023, which not only beat analysts' expectations but were able to demonstrate that demand for innovative medicines such as Enhertu, Imfinzi, and Lokelma is growing at a faster rate than many of Wall Street expected.
• AstraZeneca's gross margin was 83.7% in Q1 2023, reaching some of the highest levels in recent years, driven by lower raw material and shipping costs and increased indications for the company's key blockbusters, followed by a surge in demand.

AstraZeneca PLC ( AZN ) is one of the largest global pharmaceutical companies. Headquartered in Cambridge, it has a broad portfolio of medicines and vaccines to combat cardiovascular, oncological, respiratory, and neurological diseases. AstraZeneca's 83,500 employees drive the company's active expansion into the most remote parts of the world, strengthening its leading position in various therapeutic areas.

On April 27, 2023, AstraZeneca released financial results for the first three months of 2023. They not only beat analysts' expectations but were able to demonstrate that demand for innovative medicines such as Enhertu, Imfinzi, and Lokelma is growing at a faster rate than many on Wall Street expected.

In 2023, AstraZeneca's share price increased 8.16%, reaching multi-year highs. This was an excellent result given the intensification of competition in the cancer therapeutics market from key competitors such as Merck & Co., Inc. ( MRK ), Novartis AG ( NVS ), and Pfizer Inc. ( PFE ).

We continue our analytics coverage of AstraZeneca with a "hold" rating for the next 12 months.

AstraZeneca's Financial Position

AstraZeneca's revenue for the first three months of 2023 was $10.88 billion, down 2.9% from the previous quarter and 4.5% from the first quarter of 2022. Except for the fourth quarter of 2022, this financial indicator was beating analyst consensus estimates, especially from the second half of 2021 through the first half of 2022, due to solid demand for Evusheld (tixagevimab/cilgavimab), approved for COVID-19 prevention.

We expect sales of COVID-19 products to bottom out by the second quarter of this year and have a marginal impact on the company's financials from the third quarter. As a result, AstraZeneca's revenue is expected to grow again from Q2 2023 and be $10.57-11.3 billion, up 4.64% from analysts' expectations for the first three months of 2023. The company's three main divisions will drive growth, focused on developing and commercializing medicines that effectively fight respiratory, oncological, and cardiovascular diseases.

Cumulative oncology drug sales of $3,920 million in Q1 2023, accounting for 36% of AstraZeneca's total revenue, were up 15.7% year-over-year, driven primarily by Imfinzi and Calquence. That said, we expect the division's revenue growth to accelerate from Q3 2023 on the back of an increased share of the global lung cancer therapeutics market, one of the most common types of cancer. According to the International Agency for Research on Cancer , by 2040, there will be 314.1 thousand cases of new cases of tracheal, bronchus, and lung ((TBL)) cancer, an increase of 37.9% compared to 2020 and thus opening up enormous opportunities for Big Pharma.

AstraZeneca's gross margin was 83.7% in Q1 2023, reaching some of the highest levels in recent years, driven by lower raw material and shipping costs and increased indications for the company's key blockbusters, followed by a surge in demand. We predict that by 2023 AstraZeneca's gross margin will reach 82.5%, and by 2024 this figure will increase to 86%, which is not only significantly higher than the average for the healthcare sector but also higher than that of major competitors such as Roche Holding ( RHHBY , RHHVF ), Bristol-Myers Squibb Company ( BMY ) and AbbVie Inc. ( ABBV ). Multiple factors will drive this result, some of which are growing demand for Tagrisso, Brilinta, and Lokelma due to increased patient access in China, accelerating the launch of Fasenra and Saphnelo in key markets, and expansion of the company's drug portfolio, many of which are awaiting regulatory decisions in the next two years.

AstraZeneca's net income margin in Q1 2023 was 16.57%, continuing the upward trend that began in the third quarter of 2021. The company's earnings per share for the first three months of 2023 was $0.96, up 39.1% quarter-on-quarter, and just as importantly, AstraZeneca's management has continued to beat analyst consensus estimates over the past three quarters. Moreover, AstraZeneca's Q2 EPS is expected to be in the $0.86-1.04 range, up 15.6% on average from the Q1 2023 consensus estimate. At the same time, AstraZeneca's Non-GAAP P/E ((TTM)) is 22.42x, which is 17.48% higher than the sector average and 19.33% higher than the average over the past five years, which is one of the factors indicating that stock is already close to the overbought levels, which is especially critical in the current period of macroeconomic instability.

As of the end of the first quarter of 2023, AstraZeneca's total debt stood at about $32.47 billion, down slightly from 2021, the year the company's management under Pascal Soriot made a brilliant move by acquiring Alexion Pharmaceuticals . However, due to the growth in EBITDA in recent quarters, the Total debt/EBITDA ratio fell from 3.65x to 2.18x.

And given the maturity dates of the senior notes, we do not expect AstraZeneca to have any problems with their redemption, and the company will continue to pursue an active R&D and M&A policy, which can bring significant benefits to investors and patients from 2024.

Conclusion

We continue our analytics coverage of AstraZeneca PLC with a "hold" rating for the next 12 months.

AstraZeneca is one of the largest global pharmaceutical companies headquartered in Cambridge, with a broad portfolio of medicines and vaccines to combat cardiovascular, oncological, respiratory, and neurological diseases.

On April 27, 2023, AstraZeneca released financial results for the first three months of 2023, which not only beat analysts' expectations but also demonstrated the company's ability to continue to increase its share of the multibillion-dollar global cancer therapy market, thanks to next-generation drugs such as Enhertu, Imfinzi, and Calquence.

On the other hand, we are concerned about Mr. Market's overly optimistic expectations for the company's net income growth rate in the coming years, which, given AstraZeneca's current market capitalization, could be a bad outcome for investors in the looming period of macroeconomic turmoil. The risks associated with the loss of exclusivity of Lynparza and Farxiga in the next five years, which are among the best-selling drugs of AstraZeneca PLC, limit the future upside potential of the company's share price. In our estimation, this pressure will continue until the trends in developing the portfolio of medicines aimed at treating cardiovascular diseases become more evident.

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