AstraZeneca and the fight against virus variants

Covid-19 is keeping governments and pharma giants around the world in a perpetual game of cat and mouse – yielding new, more transmissible variants just as health authorities begin to roll out effective vaccines.

On the face of it, such mutations are troublesome news for the companies that have spent the best part of a year researching and scaling up their coronavirus jabs at an unprecedented pace. Those companies include FTSE 100 player AstraZeneca (AZN), whose inoculation debut has already been mired by difficulties after various European nations placed restrictions on its usage in older age groups amid concerns about a lack of sufficient trial data.

In the face of such concerns, the World Health Organisation (WHO) gave AstraZeneca and its partner Oxford university a shot in the arm on 10 February – recommending their vaccine for all adults, including those in countries with worrying changes in the virus's composition.

But the threat of newer versions of Covid-19 looms, even though it is hardly surprising given the inherent transmutability of viruses. Concerns have mounted after a 2,000-person study suggested that AstraZeneca’s jab failed to protect against mild to moderate disease caused by a highly infectious variant first identified in South Africa. It should be noted that the trial, which focused on young South African adults, did not assess the efficacy of the vaccine against more severe illness, nor its impact on mortality rates.

Tackling new disease strains

The upshot is that Covid-19 vaccines may need to change as quickly as flu jabs; their recipes adapting each year to battle a shape-shifting nemesis. With that in mind, investors in AstraZeneca – not to mention the millions of citizens still living in lockdown – will be reassured that the group has unveiled plans to chase variations of coronavirus.

In collaboration with Oxford, AstraZeneca “is focused on adapting [its vaccine] C19VAZ to new disease strains if required”, it said on Thursday morning. Moreover, it “hopes to reduce the time needed to reach production at scale to between six to nine months, by utilising existing clinical data and optimising its established supply chain”.

AstraZeneca’s pledge to tackle new strains at top speed comes after peer GlaxoSmithKline (GSK) outlined its own war against the variants in partnership with German group CureVac. On 3 February, the companies announced a new €150m (£132m) tie-up, building on an existing relationship, to develop “next generation mRNA vaccines” which could “address multiple emerging variants in one vaccine”.  GSK also intends to make up to 100m doses of CureVac’s original jab this year. For our recent analysis on GSK's Covid strategy 'Long Covid - why GSK may have played a better vaccine game than AstraZeneca', click here. 

Looking beyond the pandemic

AstraZeneca reiterated that it does not intend to profit from its jab for the duration of the pandemic, though it will be covering all related costs. It plans to outline any relevant revenue and earnings separately from the next quarter onward. 

Still, while the name AstraZeneca has been closely followed by ‘vaccine’ in most conversations of the past 12 months, disease prevention is not the group’s usual bread and butter. Rather, its strengths traditionally lie in oncology, respiratory and immunology, cardiovascular, renal and metabolism (CVRM) medication. And despite the havoc wreaked by the global health crisis, fourth-quarter product sales from these areas exceeded $7bn (£5.1bn) for the first time in many years, AstraZeneca revealed within its latest regulatory filing.

Product sales rose a tenth to $25.9bn for the year ending 31 December, taking total revenue up 9 per cent to $26.6bn. Central to this growth were AstraZeneca’s newer medicines, in a sign that investment in its research pipeline is paying off.

Indeed, the oncology business posted growth of more than a fifth to $11.5bn, buoyed by a rise of more than a third for sales of its drug Tagrisso to $4.3bn. Meanwhile, sales of new CVRM treatments rose 7 per cent to $4.7bn, underpinned by growth of more than a quarter for the therapy Farxiga to roughly $2bn.

Topping estimates

Looking ahead, AstraZeneca now expects to achieve low-teens percentage growth in 2021 – well ahead of analysts’ previous estimates. Earnings per share guidance of $4.75 to $5 came in just shy of market projections, but Shore Capital “continue[s] to see strong progress on the top-line and improving leverage as encouraging” in the context of continued spending on research. The group’s ‘core’ R&D costs rose a tenth to $5.9bn last year, representing more than a fifth of total sales.

Bulking up and spinning out

That said, just as AstraZeneca’s guidance excludes any impact from sales of its virus vaccine, it also ignores the effects of its planned mega acquisition of Alexion Pharmaceuticals (US:ALXN). The group announced in December that it would buy the American company for $39bn, thus providing an even stronger position in the immunology sphere. The deal, which is expected to close later this year subject to the necessary approvals, came after a rocket ride for AstraZeneca’s shares during the pandemic – at one point making it the largest listed UK company.

The group’s market value has ebbed since then. But management will be hoping that the synergies of the acquisition help to rebuild any wavering sentiment.

Astra’s strategy stands in contrast to GSK’s, which is whittling itself down rather than bulking up. The group plans to split in half next year – establishing two standalone biopharma and consumer healthcare companies. Arguably, a takeover could be in the offing once that transaction goes through. For more on this, read Bearbull's column on GlaxoSmithKline this week – Glaxo's vanishing trick. 

Inevitably, as vaccine roll-outs continue at pace, both AstraZeneca’s and GSK’s virus efforts will sit front of mind. But each of these respective transactions will go some way to determine their growth trajectories as the world moves beyond the current crisis. Underpinned by the positive signals in these results, the shares remain a buy. 

Last IC View: Buy, 8,179p, 23 Nov 2020