AstraZeneca reassured markets on Thursday with a solid set of results that reiterated its excellent growth potential. Over the past year, the company has battled negativity around their Covid vaccine, pricing pressures in China and their £29 billion acquisition of Alexion Pharmaceuticals. We are inclined to view these as distractions from the company’s underlying strengths and the stock is the second largest position in the Tellsons Endeavour Fund.
The shares sit in the defensive part of our portfolio, and we believe that focus can return to the company’s exceptional growth drivers: a range of 13 blockbuster drugs across five therapeutic areas, which now include Alexion’s rare disease business. The portfolio delivered 38% earnings growth in 2021 and is forecast to grow by a high-teens percentage in 2022. Add in a strong pipeline that produced 14 positive phase-three trial results across nine medicines in 2021 and an attractive loss of exclusivity profile, and we see no reason to doubt management’s guidance of double-digit annual earnings growth for the medium term. We are further comforted by management’s confidence to raise the dividend for the first time in a decade.
Nearer-term the market expects the company to generate approximately 20% annualised earnings growth over the next three years, double that of global developed markets. Yet the shares trade at a similar price/earnings multiple to the market, suggesting the shares are significantly undervalued.
The headwinds are real nevertheless. Revenues from its Covid vaccine will fall next year, but as demand comes from low-income countries where it is being sold at cost, the drag to profit margins will also abate. Meanwhile, in China the price cuts that were made in March 2021 will result in a decline in revenues this year; but those price cuts are meant to unlock huge potential volumes over the coming years, and there are already signs that volumes are starting to outweigh the pricing impact.
AstraZeneca has not, in our view, received the credit it should have had for agreeing to supply Oxford’s vaccine at cost to the world. Nor does the market fully credit it for its superior earnings profile and the prospect of higher margins. Credit should be given where it is due, and the share price should act accordingly.
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