- Patent worries persist
- Shareholder discontent at AGM
When AstraZeneca (AZN) announced a dividend hike ahead of a potentially fractious AGM last week, it was bound to be viewed as a sweetener for investors who’ve gone sour on the stock. Although its shares have now recovered after lurching downward in the wake of the group’s February results, they remain around 7 per cent lower than this time last year. In that time, some analysts have raised concerns about the company’s operating margins and exposure to US drug pricing reforms. A moderate decline puts the company ahead of Pfizer (US:PFE), down 37 per cent in the past 12 months, but well behind the outperformance of Novo Nordisk (DN:NOVO.B) and Eli Lilly (US:LLY), up 45 per cent and 101 per cent, respectively.
It is against this backdrop that AstraZeneca recently tabled a remuneration package of nearly £19mn for chief executive Pascal Soriot. Influential shareholder advisers ISS and Glass Lewis lobbied against the “excessive” payout, which was ultimately voted through at the AGM. Sheri McCoy, chair of the board’s remuneration committee, said the previous pay policy did not allow for high enough bonuses, or “sufficient headroom to deploy appropriately leveraged pay for performance compensation”.
More than a third of shareholders rebelled against the plan, so it’s safe to say the company’s performance will be heavily scrutinised in the coming quarters, regardless of the dividend bump.
Uncertainty building
UBS analysts have proved to be some of AstraZeneca’s most vocal detractors in recent months, downgrading the company from a buy to a sell in January on concerns it will be hit hard by forthcoming changes to US healthcare benefits. Starting next year, US residents enrolled in Part D of the federal health insurance scheme Medicare, which covers prescription drugs for chronic conditions, will have their out-of-pocket costs capped. This means manufacturers may be obliged to lower the prices of certain treatments.
UBS analysts think AstraZeneca is highly exposed to the shift via its cancer drugs Tagrisso, Lynparza and Calquence. The Swiss bank’s estimate of how much the company will earn from those cancer drugs is $2bn (£1.6bn) below consensus for 2025 and 2026. That translates to a core operating profit forecast of $18bn in 2025 and $20bn in 2026. These figures are up on the 2023 operating profit of $15bn, but below consensus estimates. Separately, AstraZeneca will also see patents on a handful of other key medicines – including the blockbuster diabetes treatment Farxiga – expire in the middle of the decade.
It’s clear there is a degree of uncertainty surrounding the company’s sales trajectory in the short to medium term. In light of this, it perhaps seems like a strange time to raise the dividend for the first time in two years. Deutsche Bank analyst Emmanuel Papadakis deemed the recent upgrade “unscheduled and impromptu”, but nonetheless moved the company from a sell to a hold rating this week. He did, however, flag “questions to be addressed on the innovation/growth outlook” and the “expensive bolt-on approach” to growth.
A full pipeline of new drugs could clearly assuage some of these concerns. The company has had to largely rely on acquisitions for new drug products. Farxiga, for instance, was purchased from Bristol Myers Squibb (US:BMY) in 2014.
Awaiting data
Nothing moves a pharmaceutical stock upward like positive clinical trial data, and that’s what AstraZeneca investors are waiting for.
In the first half of this year, results are expected from key phase III studies of two oncology drugs: Enhertu and Dato-DXd. The former has already been approved to treat select types of cancer, while the efficacy of the latter is being investigated in 14 different trials. Last year, the company initiated 27 separate phase III studies – and claimed that 10 of them have the potential to result in billion-dollar drug sales. “The beauty of our pipeline and our footprint geographically is that when one product faces a headwind, another product picks up,” Soriot said this February.
While some might view the dividend increase as a plea to stick around, bulls could see it as an unwavering dedication to investor returns.
Shore Capital analyst Sean Conroy said the boost had already been baked into consensus forecasts. “It’s really important to recognise that AstraZeneca has made two acquisitions this year and [management] guided for a 50 per cent increase in capex as they invest for long-term growth,” he said. “This is a nice reminder that they are committed to delivering dividend progression.”
McCoy has also explicitly linked the new, higher pay for Soriot and other managers to getting new drugs into the market. “[Higher pay] will further engage our executive leadership in the conversion of the strength of our pipeline to commercial success, delivering our ambition of launching 15 new medicines by 2030,” she said.
Investors and analysts will have a further chance to scrutinise AstraZeneca’s strategy at its first capital markets day for a decade on 21 May. Convincing shareholders that the progress the company has made over the past 10 years can be replicated in a more uncertain environment might be tricky. The science will ultimately speak for itself – but without new blockbuster drugs, it’s not just pay that will be under pressure from investors.
