AstraZeneca defiant in the face of Covid headwinds

The controversy that surrounded the rollout of the AstraZeneca (AZN) Covid-19 vaccine now seems like a distant memory. The company has updated its revenue guidance for the year after several of its products, including the Covid-19 prevention drug Evusheld, exceeded sales expectations in the first half. 

AstraZeneca’s greatest asset is undoubtedly its oncology franchise, which slightly underperformed expectations in the second quarter owing to lingering impacts from the pandemic. According to the company, rates of cancer diagnosis, testing and treatment are still below their pre-Covid baseline, although there is some evidence of improvement. Despite the residual headwinds, analysts at Shore Capital expect AstraZeneca’s oncology franchise to grow by almost 13 per cent in revenue terms this year.

“Importantly the strength in the top line is being directed back into internal R&D investment and EPS guidance for the year remains unchanged,” wrote Shore analysts in a note published on 29 July. “AZN has a strong mid to late-stage pipeline; we expect product and candidate-related news flow in 2023 to lead to further upgrades.”

UBS highlights the company’s increasing level of operational expenditure as a lone factor that could put margins under pressure. AstraZeneca’s core operational expenditure (opex) is expected to increase by a percentage in the mid-to-high teens, up from a figure in the low-to-mid teens. This reflects additional operating expenses of around $1bn this year.

Although shares in AstraZeneca initially fell by more than 2 per cent following the release of these results, markets didn’t appear too spooked. By mid-afternoon on results day its stock was trading a fraction above the previous day’s close. Another factor that could give potential investors pause is the fact that AZN is an expensive stock, albeit marginally. So the shares trade on a FY23 estimated price/earnings ratio of 16.8 times, whereas the average for its sector peers is 16.1 times. However, the strength of its drug development pipeline goes a long way towards explaining its premium valuation.

Since its last quarterly results, the highly promising breast cancer drug Enhertu has been approved in the US and the EU, and positive trial results for two other cancer therapies have been announced. Numerous other trial readouts and approvals are expected in the final six months of the year.

What’s more, the increase in its core operating expenses is in part a result of increased R&D spend following positive trial readouts. Investors can be confident AstraZeneca has laid the groundwork for continued success. Buy.

Last IC view: Buy, 8,628p, 10 Feb 2022