Today I am looking at why I believe AstraZeneca (LSE: AZN) (NYSE: AZN.US) is on course to endure lasting earnings weakness.
Patent problems continue to pummel revenues
AstraZeneca has taken an age to satisfactorily address the problem of patent expiration across many of its critical products, a crushing millstone on group turnover. Indeed, the drugs giant announced earlier this month that the loss of exclusivity on previous earnings drivers — which includes the likes of Seroquel IR, Atacand, Nexium and Merrem — drove revenues 8% lower during 2013 to $25.7bn. This in turn pushed operating profit 54% lower to $3.7bn.
The prospect of further patent troubles has prompted AstraZeneca to warn that it expects “a low-to-mid single digit percentage decline in revenue at constant exchange rates for 2014,” a result which is likely to cause core earnings per share “to decline in the teens.”
Paltry pipeline unlikely to offer near-term respite
AstraZeneca continues to chuck vast amounts of capital into its R&D operations in order to rectify its ailing revenues, and spent $1.43bn on new product development last year, up 8.3% from 2012.
The company is also hoovering up pharma companies across the globe to offset shortfalls in its organic product development. AstraZeneca bought out Bristol-Myers Squibb’s stake in their diabetes-combating joint venture just this month, while other major purchases over the past year include respiratory specialists Pearl Therapeutics and lipids experts Omthera Pharmaceuticals.
Although such measures have helped to boost the pipeline — 11 products entered Phase III trialling last year versus just six in 2012 — the route from laboratory to store shelf is of course a bumpy one which can take many years to complete. Indeed, chief executive Pascal Soriot warned that revenues will only recover to last year’s levels by 2017 as the exclusivity saga rumbles on.
A relatively expensive valuation
Still, investors have been unperturbed by these concerns, and AstraZeneca’s share price has shot almost 15% higher since the middle of January. But in my opinion this leaves the firm at the mercy of a severe price correction, particularly considering the superior strength of its pharmaceutical rivals.
Indeed, AstraZeneca now deals on a P/E rating of 15.6 for 2014, an expensive choice when compared against GlaxoSmithKline which currently trades on a multiple of 15.1 and has a much more bubbly product pipeline and consequently superior earnings prospects.