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AstraZeneca ruling kicks rivals into touch

Created:
12 October 2007
Written by:
Richard Hemming

AstraZeneca received a much needed boost when the European Patent Office said that a patent protecting the manufacturing of its large selling Nexium ulcer treatment was ruled valid until 2015.

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The ruling means that giant generic manufacturers including the patent’s challenger, the German company Ratiopharm, will not be able to compete until 2015. Rival drugs can only be manufactured after patent protection for the brand expires and are often produced at half the price of the brand drug because less needs to be spent on research and marketing. Nexium sales were $5.2bn (£2.5bn) globally in 2006, of which Europe accounted for $1.2bn.

The drug has been one of AstraZeneca’s five growth products that have provided sales growth after setbacks with newer products. The five grew sales by a combined 15 per cent in the six months to 30 June. However, Nexium sales stalled, growing only 4 per cent in the period.

AstraZeneca has come under severe investor scrutiny, with its share price falling by over 20 per cent in the past 12 months due to concerns that its drugs pipeline is not sufficient to fuel sales growth in the coming years.

PANMURE GORDON

Buy. The latest announcement eases concerns on generic competition materialising. In the past couple of years, shares in AstraZeneca have been kicked around because of its weak pipeline, but the acquisitions it has made - MedImmune, Cambridge Antibody Technology and Arrow Therapeutics - mean that slowly, but surely, it has built its pipeline back up and now has eight projects in late phase III trials. Our £30.75 price target assumes annual sales growth of about 6 per cent to 2010 (the market is assuming 4 per cent). For 2007, we forecast profit before tax of $9.14bn and EPS of $4.06.

CHARLES STANLEY

Weak hold. The result of the court challenge was a positive because it puts off the inevitable generic challenge that Astra must face. But there are still generic manufacturers lining up to produce a cheaper version of Nexium, before it goes off patent in 2015. The group has the biggest challenge (in transforming its drugs pipeline into revenues) of all the large cap UK and European pharmaceutical companies. We expect profit before tax of $7.95bn and EPS of $3.75 for 2007 and we aren’t forecasting any growth in earnings in 2008.

Tip Update

FairlyPriced

Our advice to sell the shares earlier this year (2,928p 9 Feb 2007) has proved well timed with the price now at 2,572p. However, we believe that a forecast earnings multiple of 12.8 for 2008 now factors in AstraZeneca's weak pipeline, making the shares fairly priced.

Last IC view: Sell, 2,398p, 29 Aug 2007

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