Report
Martin Hall

Hardman & Co Monthly: June 2019

Feature article: AstraZeneca: Where has all the cash gone?

Historically, AstraZeneca (AZN) was a leading global pharmaceutical company, but it has slipped down the rankings following a period of patent expiry on major drugs, notably Nexium, Losec and Seroquel. Understandably, the financial performance, particularly operational cashflow, has suffered during this period. Over the past two months, there have been two events which I did not expect to see during my time as a pharmaceuticals analyst in the City in the absence of major corporate activity. First, despite a considerable difference in the size and market share of their respective pharmaceuticals businesses, both globally and in the US, the market capitalisation of AstraZeneca (AZN) has exceeded that of GlaxoSmithKline (GSK). Secondly, AZN needed a Placing of shares to bolster its balance sheet immediately after paying its final dividend for 2018. As an experienced industry follower, these events set off ‘alarm bells’ in my mind.
Underlyings
600 Group PLC

600 Group is an engineering group. Co. operates these businesses from locations in North America, Europe and Australia selling into more than 180 countries worldwide. Co. has two segments: Machine Tools and Precision Engineered Components, which designs and develops metal processing machine tools sold under the brand names Colchester, Harrison and Clausing and designs and manufactures precision engineering components under the brand names Pratt Burnerd and Gamet; and Industrial Laser Systems, which operates under the combined TYKMA Electrox brand that provides laser solutions across a number of industrial laser applications including marking, engraving and micro-material processing.

Advanced Oncotherapy

Advanced Oncotherapy is focused on providing radiotherapy systems for cancer treatment through the use of a proton therapy technology. Co. operates in two business segments: proton therapy and healthcare related properties. The healthcare related property U.K. segment relates to Co.'s property in Folkestone, which is being marketed for sale.

Allergy Therapeutics PLC

Allergy Therapeutics is a pharmaceutical group focused on allergy vaccination. Co. mainly sell its products in European countries and its pipeline of products in clinical development includes vaccines for grass, tree and house dust mite, as well as a peanut allergy vaccine in preclinical development. Co. sells a range of aluminium-free allergy vaccines and diagnostics. Co. sells both injectable and sublingual (oral) formats. The commonly prescribed are those for the treatment of pollen related allergies, particularly for allergies to grasses, weeds and trees. Co.'s vaccines trade under various brand names depending on the market, e.g. Pollinex Quattro, Polligoid and TA Graser Top.

Arbuthnot Banking Group

Arbuthnot Banking Group is primarily involved in banking and financial services. Co. is organized into three main operating segments: Retail banking (associate), which incorporates household cash management, personal lending and banking and insurance services; U.K. Private banking, which incorporates private banking, commercial banking and wealth management; and Group Centre, which is comprised in Co.'s Group Centre management. As of Dec 31 2016, Co.'s total assets were £1.27 billion.

City Of London Investment Group

City of London Investment Group is the holding company for a number of subsidiaries. The principal operating subsidiary is City of London Investment Management Company Limited, which acts as an investment manager on 38 accounts with a total of £3.58 billion under management as at June 30 2017. Co. is an asset management group with an institutional client focus specializing in Emerging Market closed-end fund investments. Co.'s range also include Developed, Frontier and Global Tactical Asset Allocation closed-end fund strategies.

Diurnal Group

Diurnal Group is a pharma company developing products for the life-long treatment of chronic endocrine conditions. Co. is focused on addressing clinical and patient needs in hormone replacement, initially by developing and marketing products for the rare orphan diseases congenital adrenal hyperplasia and adrenal insufficiency. Co.'s products include Infacort®, an immediate-release hydrocortisone preparation targeting Adrenal Insufficiency (including Congenital Adrenal Hyperplasia) in children under six years of age in Europe and 16 years of age in the U.S.; and Chronocort®, a modified-release hydrocortisone preparation, initially targeting Congenital Adrenal Hyperplasia in adult patients.

Genedrive

Genedrive is a holding company. Through its subsidiaries, Co. is a molecular diagnostics business developing and commercializing a point of care diagnostics platform for the diagnosis of infectious diseases and for use in patient stratification (genotyping), pathogen detection and other indications. Co.'s Genedrive® is a patented small polymerase chain reaction platform which enables rapid nucleic acid amplification and detection from various sample types, including plasma, sputum and buccal swabs. Co. also provides contract research services to drug development companies under the Epistem brand name.

Haydale Graphene Industries

Haydale Graphene Industrials uses materials, including graphene and silicon carbide (SiC), to enhance the quality and performance of its customers' products. In the U.S., Co. manufactures proprietary silicon carbide fibres and whiskers that strengthen ceramics and enable scratch and wear resistant coatings. Applications for SiC include scratch resistant cookware, corrosion barriers for oil and gas pipelines and cutting tools, for example, jet engine turbine blades from solid billets. Co. has developed proprietary graphene-based inks and coatings for the print and biomedical sensor markets, as well as enhanced resins for the pre-preg carbon fibre market.

Koovs

Koovs is an online western fashion destination in India. Co. is engaged in supplying fashion garments and accessories for distribution through the KOOVS.COM website including international fashion brands, British high street brands and Co. own-label product designed by a team based in London.

Morses Club

Morses Club is a United Kingdom consumer finance business in the Home Collected Credit market. Co.'s customers are served by self-employed agents, as well as employees based across 98 branches. Co. operates through a series of local branches based all over the UK. Co.'s field management team operate from these branches, working with its network of self-employed agents.

Murgitroyd Group PLC

Murgitroyd Group provides a range of Intellectual Property advisory services through its trading subsidiaries Murgitroyd & Company Limited, Murgitroyd SARL and Murgitroyd LLC, European Patent and Trade Mark Attorneys.

Primary Health Properties PLC

Primary Health Properties is a holding company and a real estate investment trust. The principal activity of Co. is investment in primary healthcare property in the U.K. and Ireland. Co.'s properties are leased principally to general practitioners, government healthcare organizations and other associated healthcare users.

R.E.A. Holdings PLC

R.E.A. Holdings is principally engaged in the cultivation of oil palms in the province of East Kalimantan in Indonesia and in the production and sale of crude palm oil and crude palm kernel oil. Ancillary to these activities, Co. generates renewable energy from its methane capture plants to provide power for its own operations and also for sale to local villages via the Indonesian state electricity company. As of Dec 31 2016, Co. held interests in respect of two stone deposits and two coal mining concessions, all of which were located in East Kalimantan in Indonesia.

Redx Pharma

Redx Pharma is engaged in drug discovery, pre-clinical development and licensing. The principal activities of the business are the discovery and development of proprietary, small molecule drugs to address areas of high, unmet medical need. Co. is developing a porcupine inhibitor drug candidate, RXC004, as a cancer treatment using in vivo models of pancreatic and gastric cancer. ROCK1/2 inhibitors (known as systemic pan-Rock inhibitors) are known to induce hypotension. Co.'s ROCK inhibitor is designed to only work at the site of action in the gastrointestinal tract and degrades quickly, once absorbed, through enzyme-mediated metabolism in the blood, deeming it a soft inhibitor.

Titon Holdings PLC

Titon Holdings is engaged in the design, manufacture, marketing and sales, plus its associate's activity in real estate development: trickle vents and hardware products for the window and door fabricator markets in the U.K., Europe and the U.S.; mechanical ventilation products for the new build residential markets in the U.K. and Europe; and natural ventilation products for the new build residential market in South Korea. The first two activities are carried out by Co.'s subsidiaries, Titon Hardware Limited and Titon Inc. (in the U.S.). The third activity is carried out by Co.'s subsidiary, Titon Korea Co. Ltd. and Browntech Sales Co. Limited, Co.'s associate company.

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Analysts
Martin Hall

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