Today I am looking at an eye-opening reason why I believe a modest product pipeline is set to constrain earnings growth at AstraZeneca (LSE: AZN) (NYSE: AZN.US).
Pipeline problems set to persist
Shares in AstraZeneca have recovered steadily from the severe weakness of last summer, rising 9% from the same period in 2012 as optimism over the company’s pipeline-development strategy has taken off. Although the company is undoubtedly heading in the right direction, I believe that AstraZeneca is set for further heavy earnings pressure before its recovery strategy kicks revenues higher.
Under new chief executive Pascal Soriot, AstraZeneca’s future revenues prospects received a huge shot in the arm through a revised growth plan announced in March. The firm is aiming to double the number of Phase III testing asset volumes by 2016, aided by the establishment of a network of R&D centres across Europe. It is also aiming to concentrate product development towards three key areas: respiratory, inflammation and autoimmunity; cardiovascular and metabolic disease; and oncology.
Although this bodes well for earnings growth over the long term, AstraZeneca still faces massive revenues upheaval in the meantime. The company’s ambitious pipeline resuscitation plans are not ready to deliver tangible returns until 2016 at the earliest, and indeed the firm’s delayed move in restructuring its R&D operations has resulted in severe earnings weakness as critical product patents have gradually expired.
AstraZeneca saw revenues slumped 18% during January-June at constant exchange rates, to $12.62bn, a result that prompted core operating profit to dip 16% to $4.38bn. Indeed, the issue of patent loss resulted in a $500m dip in revenues in the second quarter alone. And City analysts are expected the issue to continue weighing on earnings well into the future, with a 19% and 6% drop in earnings per share forecast for 2013 and 2014 respectively.
And although the company’s product testing schedule is ticking along steadily, the results of these studies — if successful — are not expected to boost earnings for some time. In positive news the firm’s Fluenz Tetra flu drug for children received a positive assessment from the European Medicines Agency last week. The company is now awaiting European Commission approval before launch, but if given the green light, launch is not expected until 2014.
AstraZeneca is also ramping up its acquisition activity in order to supplement its organic pipeline, its most recent purchase during a busy few months being cancer immunology specialists Amplimmune in late August. But as I have said, the prospect of great earnings pressure is likely to weigh heavily while the firm’s recovery measures get into gear.