We are initiating coverage on AstraZeneca (AZN) with a Neutral recommendation and a target price of $47.00.
AstraZeneca, headquartered in London, UK, is one of the largest biopharmaceutical companies in the world. AstraZeneca’s business can be broken down into separate lines based on therapeutic classes. These include: gastrointestinal, cardiovascular, respiratory and inflammation, oncology, neuroscience, infection and other.
The company’s key products include Crestor (cholesterol management); Nexium (acid reflux); Seroquel (schizophrenia and bipolar mania); Atacand (hypertension and symptomatic heart failure), Arimidex (breast cancer), Zoladex (prostate and breast cancer) and Symbicort (asthma).
We are impressed by the performance of lead drug Crestor which is primarily responsible for AstraZeneca being one of the leading players in the global cardiovascular market. The US launch of Brilinta (ticagrelor) for the reduction of the rate of heart attack and cardiovascular death in adults suffering from acute coronary syndrome (ACS) earlier in the year further boosted AstraZeneca’s cardiovascular segment. Moreover, the company’s focus on the high-potential emerging markets also encourages us.
However, we remain concerned about the generic competition faced by its key products. Generic competition was primarily responsible for the 7% reduction in US revenues in 2010. The genericization of key products will make it challenging for AstraZeneca to drive the top-line.
In addition to generic threats, AstraZeneca’s products already face intense competition in the market from both large pharma companies as well as small and mid-sized companies. AstraZeneca’s Crestor primarily competes with Pfizer’s (PFE) Lipitor and Merck’s (MRK) Zocor/Vytorin. The entry of generic versions of Lipitor could affect Crestor’s market share. Nexium primarily competes with Pfizer’s Protonix. Another blockbuster product, Seroquel, competes with Eli Lilly’s (LLY) Zyprexa, Johnson & Johnson’s (JNJ) Risperdal, and Pfizer’s Geodon.
The company is looking to lessen the impact of genericization by reducing its cost structure.The lack of near-term catalysts at AstraZeneca is another concern. We expect the company to look for additional partnering deals and acquisitions.
We see limited upside potential from current levels and initiate coverage on the stock with a Neutral recommendation.
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