Research Paper

AstraZeneca Pharmaceuticals, (AZN) is one of the world's leading pharmaceutical companies with 57,000 employees worldwide in over 100 countries. Its corporate headquarters are in London, research and development headquarters are in Södertälje, Sweden, and its manufacturing facilities employ 9,600 people in 16 different countries. The company operates fourteen research and development sites in eight countries and has sales in over 100 countries around the world. AstraZeneca focuses its pharmaceutical business on seven key therapeutic areas: anesthesia and pain control, cardiovascular, central nervous system, gastrointestinal (it is a world leader in this therapeutic area), infection, oncology, and respiratory. Its product range includes such blockbusters as Nexium, Crestor, Seroquel, and Symbicort.
AstraZeneca was formed as the result of the 1999 merger of two European pharmaceuticals companies: Astra AB of Sweden, a maker of pharmaceutical products and medical devices, and Zeneca PLC of the United Kingdom, a bioscience company focusing on pharmaceuticals, agricultural and specialty chemicals, and disease-specific healthcare services. One year after its merger, the company achieved sales of US$15.8 billion, with an operating profit of US$4 billion. In 2011, company sales and operating profit were $33.6 billion and $13.2 billion respectively.
AstraZeneca is one of the world's largest pharmaceutical companies, with FY2011 sales of $33.27 billion and $10.98 billion in profits before taxes. AstraZeneca's wide-ranging portfolio of products includes some of the world's most successful drugs. Analysts credit AstraZeneca with having one of the most diversified drug portfolios in the pharmaceutical industry. In all, AstraZeneca has 9 blockbuster drugs (with $1 billion or more in annual sales) in five different therapeutic categories. All in all, these products generated 75% of the company's revenue in 2011.
Despite sunny short term prospects, AstraZeneca will face serious challenges in the future. Despite substantial R&D spending, the company's development pipeline has failed to produce any extremely promising candidates for future blockbuster drugs. In response to the expected drug drought, AstraZeneca acquired MedImmune in 2007 for $15.6B. Although the acquisition may help to revive AstraZeneca's lackluster pipeline, many investors caution that AstraZeneca paid far too high a price for the company.
Having reviewed AstraZeneca’s annual reports and 20-F Information for fiscal years 2010-2012, I will provide a look into the liquidity, activity, debt, profitability, and market and provide an overall view of AstraZeneca’s financial performance and outlook.
In terms of liquidity, both the current and quick ratios continue to decline steadily starting in 2010 and continuing through 2012. In 2010, AstraZeneca had a current ratio of 1.50 and quick ratio of 1.34 and in 2011 saw both figures decline slightly to 1.49 and 1.32 respectively. Those numbers continued to decrease to 1.37 and 1.22 as AZN saw return on equity and return on assets increase in 2011 and then sharply decline in 2012. Liquidity also continues to be negatively impacted by short-term borrowings used to finance small acquisitions and in-licensing agreements. In the short-term, AZN will very likely continue to struggle with liquidity as revenue from drug sales continue to decrease due to expiring patents, rising costs of R&D, on-going patent litigation and increased competition from generics. The decline in Quick Ratio from 1.34 in 2010 to 1.32 in 2011 to 1.22, would imply that AZN is becoming an increasingly risky financial investment.
Current and quick ratios over the past four years would indicate that AstraZeneca is in good standing relative to inventory. Since 2008, AZN’s current ratio has been below industry average, however, its quick has been above average for the past two years. This data could mean that AZN has more inventory on hand, on average, than its competitors. The difference in this data, again, slightly above industry average, is not significant and implies that AZN has few concerns about liquidity risk. In looking at AZN’s steadily declining Return on Assets (%), which went from 18.39 in 2011 to 11.90 in 2012, it would appear that AstraZeneca is not currently operating as efficiently as it has in the several years.
AstraZeneca’s total debt has continued to increase since 2010, going from $9,222 ($ Millions) to $10,310. The organization has focused on driving efficiency and decreasing costs, and has effectively decreased its total current liabilities each year since 2010. Despite the steady decrease in liabilities, AZN continues to see its long term debt increase (i.e. accounts payable), due in part to its investment in its long-term R&D strategy. Long-term debt to Total Equity and Total Debt to Total Equity have remained steady over the past three years, averaging 0.37 and 0.41 respectively. This would imply that returns to shareholders have remained fairly steady over that period of time.
Relative to profitability, AstraZeneca saw its sales decrease from 2011 to 2012 ($336 million to $280 million) and revenues decreased by 17% (to $27.97B). Net income decreased by 37% to 6.3B (down from 10B in 2011). Net income also reflects a profit on disposal of subsidiary decrease from $1.48B (income) and R&D restructuring increase of 69% to $791M (an expense). Gross margin has remained steady over the last three years (averaging 81.55 with less than 1% difference over that time). Operating margin decreased from 38.09% in 2011 to 29.13 % in 2012. This data would indicate that production expenses have had little impact on profitability in the past three years, while operating expenses have had a greater impact. This supports the ROA data referenced earlier.
Despite AstraZeneca’s struggles with profitability, investors continue to have confidence in the firm as its price/earnings (P/E) ratio of 9.49 in 2012 has AZN amongst the top 80th percentile in industry PE ratio rankings (ranking 3rd out of 15 for top major drug manufacturers). The 9.49 ratio represents a significant recovery from a five year low ratio of 5.83 in 2011, when investors were likely less confident in AZN due to two failed compounds in late stage discovery and on-going organizational restructurings/layoffs.
In summary, AstraZeneca has experienced steady declines in Sales, Income, ROA and EPS in the past 24 months. Their total assets have continued to grow due to M&A activities and the acquisition of intangible assets (i.e. intellectual property). The steady increase in Payout Ratio would indicate that the organization is staying true to its strategy of less organic growth, in favor of small M&A and in-licensing activities. Despite declines in revenue and ongoing regulatory and market challenges, investors continue to have greater confidence in AZN versus its competitors. The firm is likely betting heavily on its pipeline delivering blockbuster products that will replace those coming off patent in the coming 12-24 months. The data enclosed would indicate the AstraZeneca will need to continue to drive down costs, focus on operations efficiency, and continue to invest in low-cost M&A that will provide its pipeline and portfolio with a much needed boost.

Bibliography

AstraZeneca Pharmaceuticals (2013). Annual Reports. Retrieved February 20, 2013 from http://www.astrazeneca.com/Investors/Annual-reports.

AstraZeneca Historical PE Ratio TTM Data. (2013, Febuary 22). Retrieved February 22, 2013 from http://ycharts.com/companies/AZN/pe_ratio.

Appendix A: Ratio Worksheet

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