By HESTER PLUMRIDGE
Most big pharma companies nowadays are looking to diversify. Not AstraZeneca, which believes in sticking to its knitting. That is reflected in Wednesday's $1.8 billion sale of its medical-devices unit AstraTech to U.S. dental specialist Dentsply International.
Admittedly, the U.K.-based drug company, with a market capitalization of $68 billion, was already heavily focused on prescription drugs. The sale has increased that concentration. That is a bold strategy, given AstraZeneca's poor track record in recent launches. The outlook for its shares now rests on the fate of a handful of key products. For investors, which currently reward more-diversified rivals with higher share-price multiples, it may be too much to swallow.
AstraZeneca's revenues are already forecast to fall more sharply than its peers' in coming years, as a higher proportion of its drugs face generic competition. And the market may be too optimistic on the outlook for its bestseller Crestor. The cholesterol treatment—responsible for 17% of group sales—faces competition from generic Lipitor this year. The market is pricing in flat U.S. sales until 2015, but the decline could be as steep as 40%, shaving as much as 6%-8% off 2015 earnings.
Meanwhile, AstraZeneca has yet to prove it can boost sales through drug launches. New treatments for infant lung disease and high cholesterol were discontinued last year. The market believes its brightest pipeline hope, Brilinta—a blood thinner and potential blockbuster—will gain U.S. approval in July. But the risks on approval are high, and prescriptions by U.S. physicians in the event of success are hard to estimate. Differing sales forecasts for Brilinta alone could see 2014 earnings revised upward or downward by 5%.
Sure, AstraZeneca's shares have other attractions: Market expectations for a new diabetes treatment, which could be approved this year, are low. AstraZeneca got a good price for AstraTech. At 17 times trailing earnings before interest, taxes, depreciation and amortization, AstraTech was sold at a higher multiple than recent deals in the sector, and above the 12-14 times at which listed peers trade. Proceeds from the sale could swell the $4 billion share buyback already announced for 2011.
And AstraZeneca currently trades at a 10%-12% discount to large-cap peers, based on 2012 earnings. But that doesn't adequately reflect the risk its earnings could fall as much as 5% in coming years, versus 1.9% growth at peers, notes Nomura. For investors, AstraZeneca may prove too-concentrated a risk.
Write to Hester Plumridge at Hester.Plumridge@dowjones.com
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