AstraZeneca (AZN)

Investor activism is on the rise and one of the latest victims is the chief executive officer of AstraZeneca, David Brennan, who has decided to call it a day following disquiet over the company's performance, and investors calling for a management shake-up. The gap will be filled by the chief financial officer, Simon Lowth, who will be acting interim chief executive until a replacement is installed. The UK's second largest drug-maker by costs has been aggressively cutting costs, by reducing operations and cutting thousands of jobs, while maintaining cash flow to shareholders.

The stock has risen just one per cent over David Brennan's six year tenure, which has included drug-development failures and difficulties in bringing new products to market. The news comes with a 44 per cent drop in first-quarter profit to US$1.64bn from US$2.91bn, and an 11 per cent drop in revenue to US$7.4bn from US$8.3bn. The shares dropped sharply on the news, down six per cent. In order to get things back on track the company is looking at new approaches to help it deal with impending patent expiries. Options include making larger acquisitions, focusing on smaller deals, developing internal drug ideas and diversifying.

In an effort to strengthen its pipeline the company has been making a number of deals, most recently the purchase of gout specialist, Ardea for US$32 a share, or US$1bn. It also made an agreement with biotech firm, Amgen, earlier in April to co-develop and commercialise five inflammation treatments, for which AstraZeneca paid US$50m up front. These deals will go some way to bolster a portfolio that includes top sellers like the antipsychotic Seroquel, and the ulcer treatment Nexium, which will soon lose patent protection. There is also the loss of patent protection in 2016 in the US for the company's best seller, the heart drug, Crestor. According to AstraZenaca's head of research and development, the collaboration illustrates the drive to externalise medicine discovery in conjunction with in-house innovation.

The investment banking community has a mixed outlook on AstraZeneca. On 1st May Bank of America Merrill Lynch nudged up its view from 'underperform' to 'neutral', on the back of a ten per cent share price fall in the year-to-date. It sees the yield as a limit on further downside and has a 3100p target. On 30th April Jeffries said it sees the stock as a 'buy' with a target of 2975p, revised down from 3050p. It thinks the market has inflated expectations for revenues but sees a good entry point to take advantage of the attractive yield.

The recent share price dip presents an opportunity to pick up this FTSE 100 stock with a decent yield and below average price/earnings ratio. The dividend of seven per cent is covered around 2.65x and has grown for the last five years. Management recently confirmed its progressive dividend policy. The price earnings ratio of six is well below the pharmaceutical and biotech sector average of 11, and some way below its blue-chip peers like GlaxoSmithKline and Roche. Cash flow is strong and there is over US$6bn on the balance sheet. Risks include the lack of visibility in the pipeline and recent management changes at the top of the company. Bringing products to market can take around ten years from discovery, through development to commercialisation and these difficulties, although well flagged, have brought the shares down to their current level.

Therefore, whilst our view does not constitute a personal recommendation and any advice given to individual clients would vary according to their personal risk profile and objectives, we rate AstraZeneca a speculative buy.

Robert Kilner, Stockbroker

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