What we Thought of AstraZeneca's Q2 Earnings
We are holding steady to our £124/$78 fair value estimates (local/ADR) for AstraZeneca (AZN) following second-quarter results that were largely in line with our expectations. However, the higher operating expenses in the quarter are likely weighing on shares, as the market was potentially expecting better operating margins. We expect margin improvement over the next three years as the firm leverages several recent product launches.
In the quarter, total sales increased 17% operationally with broad support across the firm's portfolio. However, we expect growth will decelerate as generic pressures increase on respiratory drug Symbicort and cardiometabolic drug Farxiga over the next 18 months. As the firm's leading drug, the generic headwinds on Farxiga will likely drive total sales growth toward mid-single digits by late 2025.
On the positive side, the cancer division continues to post strong gains (up 19%). New indications and recent drug launches in the group should continue to drive steady gains. However, we are increasingly concerned about the competitive threat from Johnson & Johnson's Rybrevant/Lazertinib combination against Astra's largest cancer drug Tagrisso in lung cancer. Nevertheless, Astra holds a diverse portfolio of cancer drugs that should support long-term growth and reinforce its wide moat.
Astra also reiterated its long-term guidance of $80 billion in risk adjusted sales by 2030 (excluding acquisitions) and core operating margins in the mid-30s by 2026. While we expect the firm will reach the margin goals, we remain sceptical of the 2030 sales target. We believe Astra is likely more bullish on its pipeline than our expectations. In particular, Astra holds many mid-stage cancer drugs that hold strong launch trajectory potential if late-stage data is successful. If Astra can achieve the long-term sales guidance, there is significant upside to our fair value.
Key Morningstar Metrics for AstraZeneca
• Fair Value Estimate: £124.00
• Morningstar Rating: ★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium