Sunday, July 18, 2010

Company Focus: AstraZeneca

The biotechnology and drug industry has come a long way in recent years. Formally filled with small, one product companies without sales and earnings, the industry now has major players. AstraZeneca (New York: AZN) is one such player.

AZN has a rich product line focusing on six areas of healthcare: gastrointestinal, cardiovascular, respiratory, oncology, neuroscience and infection. The leading drugs in each category are: Nexium, Crestor, Symbicort, Arimidex, Seroquel, and Synagis, respectively.

For FY 2009, Nexium accounted for approximately 15% of sales; Crestor 14%; Symbicort 7%, Arimidex 6%, Seroquel 15% and Synagis 3%. Total sales for FY 2009 totaled $32,804 billion.

Despite the difficult worldwide financial situation, AZN continues to grow. Sales for the 12 month period ending 03/10 grew 6.5%. For 1Q10, sales grew 11% over the year-ago period. Long term, sales grow at more than 7%.

Earnings growth remains robust. EPS basic grew at the rate of 21.1% during the 12 month period ending 03/10. In 1Q10, EPS grew 28% to $1.90 as compared to $1.48 in 1Q09. Long term, EPS is growing at about 19.9%.

The company consistently reports positive free cash flow and pays a dividend of $3.42 per share. At a recent trading price of $48.79, the dividend yield is about 7.0%.

AZN has a strong balance sheet. Cash and short term investments total $9,396.0 billion. Long term debt is $9,055.0 billion.

On a valuation basis, the shares of AZN look very cheap particularly when compared to its peers. The PE TTM is 8.7X trailing earnings of $5.61 and 7.8X estimated 2010 earnings of $6.29. Five analysts follow AZN. Their earnings estimates range from a low of $6.25 to a high of $6.31. This very tight range indicates a very high confidence level for the estimates. We estimate EV/EBITDA to be about 6.5X.

Looking at profitability ratios, we see strength. The current ROE at 41.5% exceeds the long term average ROE of 34.28%. Gross margin is at 82.0% is down only slightly from FY09 when the gross margin was 83%. The gross margin remains significantly about the long term average of 79.23%.

Similarly, operating margins are better now than in the past. The most recently reported operating margin is 35.7%, slightly better than FY09 and dramatically better than the long term average of 25.98%.

Disclosure: Author is long AZN.

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