AstraZeneca shares are still vulnerable…
After declining Pfizer’s £55-per-share bid, which offered a 50% premium to the pre-announcement price, AstraZeneca (LSE: AZN) has backed itself into a corner on growth commitments in order to smooth over ruffled feathers among some investors.
Management promised revenue growth of 75% over 10 years and, while most analysts took this with a pinch of salt anyway, it is already failing to deliver just over one year on.
In 2014, group revenue growth was not enough to outpace cost inflation, which led to a deterioration in the top line. Furthermore, after accounting for increased R&D expenditure and higher financing costs, bottom-line profits fell by 51%.
However, despite these pressures, the biggest problem facing Astra is actually its drug development pipeline, which is precariously dependent upon the ever-more crowded market for cancer drugs, while the group’s existing businesses are increasingly exposed to the threat of generics.
Astra’s development activity may sound good in a quarterly presentation, and these numerous cancer treatments may actually pay off over the longer term, but they could also seriously impact Astra’s ability to deliver if even one of them doesn’t work out as well as management are hoping.
Furthermore, Astra’s latest ‘blockbuster’ (type II diabetes drug Forxiga) has just been pipped at the podium by the FDA in the US and by Eli Lilly’s own diabetes treatment Jardiance.
Even after Forxiga’s success in phase 3 trials, the FDA still has safety concerns over its use in some types of patients, while Eli Lilly has just announced the results of trials into the use of Jardiance as a cardiovascular treatment.
Lilly’s study showed Jardiance has a clear-cut ability to protect against and reduce the impact of cardiovascular disease, in addition to treating diabetes, which has now led to it being hailed a game changer that may leave Astra’s Forxiga project dead in the water.
This makes it difficult for me to shake the feeling that there could still be more pain ahead for Astra shareholders over the near-medium term.
Shire could be a different story…
Shire’s (LSE: SHP) most notable claim to fame are the ADHD medications Adderall and Vyvanse, lauded for various qualities worldwide by the investment banking and student crowds, but probably despised by the ‘active’ types within the pre-teen & teen age groups.
While the group faces similar challenges to Astra in terms of patent expiries, generic competition and a poor pipeline, its Vyvanse franchise has just been approved as a treatment for ‘binge eating’ in the US.
Although this is a new market, when considering the proliferation of sedentary lifestyles and obesity in the western world, could we be witnessing the emergence of a new trend in healthcare and fiscal policy?
Is the obesity crisis now reaching such critical mass that we are now on the verge of encouraging weight loss by drugging large portions of the population? Are we about to witness a revival of the ‘slimming pill’? Who knows, but if we are, then Shire is the first to the party.
This may or may not be enough to prevent further share price weakness over the near term; however, it could prove to be a helpful talking point for management in the event that their efforts to M&A their way toward a revitalised portfolio crashes or burns, if you’ll pardon the pun…