Summary

• AstraZeneca Plc (AstraZeneca) is a global, science – led biopharmaceutical company.
• Over 2020 it delivered double – digit revenue growth, improved profitability and cash generation. Revenue growth has been accelerating since 2017 and should keep the pace in the future.
• The company has kept its dividend unchanged for years even though payout ratio has been north of 100%.
• The debt is high. Improving cash flow should allow deleveraging in the future.
• The current stock price is fair by stock evaluation method based on P/E ratio.

Dividend    Revenue    Profitability    Financial Strength    Investment Case

AstraZeneca (AZN) develops and manufactures prescription medicines in Oncology and Biopharmaceuticals, including Cardiovascular, Renal and Metabolism, and Respiratory & Immunology. It has improved the quality of life for millions of patients around the world.

The main therapy areas are:

• Oncology – 42% of total sales in 2020; treatment of cancer; 18 approvals of new medicines in 2020. Products: Tagrisso, Lynparza, Imfunzi, Zoladex, etc.
• Cardiovascular, Renal & Metabolism – 27% of sales. Brilinta and Farxiga provide foundation for growth.
• Respiratory & Immunology – 21% of sales. Key growth drivers are Fasenra, Symbicort and Breztri.
• Other Medicines and Covid – 10% of sales. Development of medicines in infection, neuroscience and gastroenterology areas.

The company has 171 projects in development pipeline. 29 new medicines were approved in major markets in 2020. AstraZeneca developed and supplied vaccine at no profit during the pandemic. It spent on R&D around USD 6 B.

In December 2020 it was announced that the company reached agreement to acquire 100% of Alexion Pharma, immune – mediated rare disease global leader. The acquisition should accelerate sales and scientific research further as well as improve profitability and strengthen cash flow.

Please note that the stock price of AstraZeneca, quoted in our website is the price of ADR (American Depositary Receipt) in USD multiplied by 2.

  Dividend

Dividend	Dividend Yield	5Y Growth	PayOut Ratio	Ex-Dividend Date
USD 2.8 per share	2.5%	0% per year	115%	2021 08 12

The company has paid fixed dividend for many years, but payout ratio has been above 100% in the past 5 years. AstraZeneca has ambitions to increase the dividend in the future. As it has not been covered by earnings in the past, for our projections we assume that in the future it would be fixed at the current level.

  Revenue

Revenue	5Y Growth	Revenue growth over 2020	Company Outlook 2021
USD 26.6 B	2.4% p. a.	Total sales                             9% By divisions: Oncology                              25% Cardiovasc., Renal & Met.   3% Respiratory & Immun.        -1% Other Medicines                  -1%	To grow revenue by a low teens percentage.

Revenue is up 9% over the year. It consists of Product sales of USD 25.9 B (up 10%, including 8 blockbuster medicines) and Collaboration revenue of USD 0.73 B (down 11%). Total revenue from new medicines improved by 33% to around USD 14 B. Investments in new medicines fuel growing Oncology and Biopharma therapy areas. Sales are led by Tagrisso and Lynparza in Oncology and Brilinta and Farxiga in New CVRM. AstraZeneca’s pipeline is strong with 22 phase III medicines and significant lifecycle projects.

The company was the second fastest growing top 10 pharma companies in emerging markets last year. Emerging markets sales increased by 6%, driven by China.

Long term revenue growth has been moderate but accelerating each year since 2017. In 2021 AstraZeneca intends to grow revenue in low teens percentage. From Alexion alone the company expects double – digit average annual revenue growth through 2025. So in the future we could see the strong revenue growth trend to continue.

  Profitability

Profit	5Y Growth	Net Profit Margin	ROE	Company Outlook 2021
EPS USD 2.44 Net Profit USD 3.14 B	1.8% p. a.	11.8% in 2020 5% in 2019	20%	Core EPS in the range USD 4.75 to USD 5

Operating profit amounted to USD 5.16 B, up 77% from USD 2.9 B in 2019 driven mostly by product sales growth. Core operating profit is up 14% to USD 7.24 B.

EPS has been in downtrend since 2016. This trend is reversed in 2020 as it is up 137% over the year. Core EPS is USD 4.02 per share, up 15%. The growth is impressive in comparison with moderate 5 years average growth.

In 2021 the company expects at least 18% of Core EPS growth. With strong expected sales, profitable pipeline and contribution from Alexion we could assume double digit EPS growth in the future.

   Financial Strength

Company Capital Structure

In USD B

Year	2018	2019	2020
Equity	14.044	14.596	15.638
Cash	4.67	5.223	7.546
Debt	19.113	18.227	20.38
Net Debt	13.003	11.904	12.11
Debt/Equity	136%	125%	130%

AstraZeneca’s debt has been high. Its Debt/Equity ratio has stayed around 130%. Net operating cash flow is 23% of debt and interest coverage by operating profit is at 4x. The company has S&P credit rating of BBB+. It expects improved cash flow in the coming years and that should allow some deleveraging.

   Investment Case

The estimate of future stock price and investment returns based on P/E ratio

Assumptions of dividend and EPS growth over the next 5 years
We assume fixed dividend for the next 5 years. So the total dividend income over the next 5 years would amount to USD 14. EPS could grow at the rate of 15% p.a. Then EPS in 5 years will be USD 3.93 per share.
Projected stock price
Average P/E over the last 5 years (26.32) multiplied by EPS in 5 years = 26.32x USD 3.93 = USD 103.4
Future Returns Based on the Assumptions
Stock price upside potential                                       15%    from the current price USD 112.62 Overall return on investment*                                    27% Compound Annual Return on Investment                  5%

*- Includes the expected dividend income over the next 5 years and dividends are not reinvested.

Global demand for healthcare is increasing and healthcare spending is projected to increase at an annual rate of 4.2% from 2019 to 2024. AstraZeneca is well positioned to benefit in this environment with its pipeline of profitable innovative medicines. On the other hand, there is downward pressure on the pricing of medicines in major markets, including China, Europe and the US, threatening the future profitability.

The stock price is close to fair value by historical P/E measure and returns are potentially limited to single – digit percentage per year on average.

Disclosure:

I have no position in the stocks mentioned in this article and do not intend to initiate any positions within the next three days.

 

Notes

Data source – the company’s financial reports and presentations. Source of pictures – the company website unless otherwise stated. Colored circles next to headings mean an author’s evaluation of the relevant performance criteria of the company: green means positive, yellow neutral and red negative evaluation. There are many ways to estimate the future stock price. We use only one of them, the one based on P/E ratio. All estimates made in the article are for the informational purposes only. No taxation, brokerage fees and other expenses related to investing are considered in the estimates. The estimates are the result of the rule of thumb assumptions and the real outcome might differ materially from those estimates. As the future unfolds, macro events, not mentioned in the article, could impact the company fundamentals. Use the information in the article only as a starting point for your own due diligence.