AstraZeneca Plc boss Pascal Soriot recently said he hoped there’d be more than one successful vaccine against Covid-19 given the sheer quantities required. His company’s shares have soared this year largely on hopes for the University of Oxford shot that it’s helping test, manufacture and eventually distribute.
But on Monday AstraZeneca’s investors didn’t celebrate encouraging data from rival Pfizer Inc.’s coronavirus vaccine. The UK firm wasn’t the only drugmaker to see its shares fall, but the decline in its stock looks like an expression of disappointment it might not “win” the race to land a preventative drug.
In reality, the ambition to develop a vaccine has never been a good reason to buy into AstraZeneca. It doesn’t specialize in inoculations and probably never will. The central question for investors is whether the company can meet the high expectations for its existing drug pipeline — an issue that may now come back to the fore.
Soriot, who hopes to show regulators trial data by year-end, has always said the firm would not profit from any successful prophylactic during the pandemic. A commercial seasonal vaccine is a possibility later, but it’s too soon to say if it will be an option. Bloomberg Intelligence analyst Sam Fazeli points out the mechanism through which the AstraZeneca vaccine functions means it might become less effective after repeat doses. What’s more, there would be competition.
Either way, AstraZeneca’s commercial value clearly resides substantially in its core scientific expertise, in particular in oncology, led by drugs combating lung, bladder, ovarian and other cancers. The company was already highly valued before outperforming during the pandemic due to a hoped-for acceleration in sales and earnings. Hence the shares’ sector-leading multiple of 27 times this year’s expected earnings falls to just 14 times when based on significantly higher net profit forecasts for 2023.
To grow into the valuation AstraZeneca must sustain the quarterly sales expansion it’s been demonstrating since mid-2018. Then it must translate that into earnings and, in turn, cash. The recent record there is less good, as analysts at UBS Group AG have pointed out. The cash conversion problem stems from the fact that AstraZeneca has expanded extensively through collaboration. Payouts to partners regularly divert cash away from shareholders.
There’s been progress. Oncology sales were up 24% year-on-year (at constant exchange rates) in the first nine months of 2020, making them 43% of the total. The companywide operating margin was 19%, up from 13% in the same period in 2019. The company is still paying its dividends substantially out of borrowings, hence net debt was up from the year-end. But AstraZeneca looks on course to hit its goal of fully funding the payout on its own in 2021, having been among many FTSE-100 groups reluctant to anger investors by cutting it.
Neither a Covid vaccine nor a covered dividend would justify AstraZeneca’s share price. Only outstanding delivery on the pipeline can do that. Hopefully AstraZeneca’s Covid trial data will be as promising as Pfizer’s — we will indeed need more than one. But its valuation rests on fighting other diseases.
Bloomberg
