EUR 4635.28 For Business Accounts Only

Are we nearly there yet?

In years to come, AZN’s history could be split B.C. and A.C.; Before Crestor and After Crestor. It has been almost three years since the market started to focus on what AZN would look like post Crestor. The bridge through this period has been the Externalisation revenues that have propped up the P&L. We show that the quality of AZN earnings should improve materially by 2018 with just $400m of Externalisation in our forecasts. Moreover, our proprietary valuation methodology shows that durvalumab is only worth £5/share compared to AZN’s entire P3 pipeline valuation of £21/share. With a multitude of catalysts to come over the next 15 months, we believe AZN will continue to outperform.

MYSTIC may be Binary, but AZN is not – Many investors have concluded that the MYSTIC study (PDL-1 in Lung cancer) is binary and hence so is AZN. Durvalumab is only worth £5/share of our £60/share price target. Moreover, we don’t believe the study is binary with multiple outcomes possible (PDL-1 in mono, PDL-1+treme, different PDL-1 expression cutoffs, PDL-1 high or low expressers). We rate the chances of consensus PDL-1 sales falling to zero after MYSTIC reads out, at around 10-20%.

Multitude of near-term Catalysts – AZN has a large number of catalysts over the next 15 months with 2 important events expected by year end: Lynparza in breast cancer and acalabrutinib pivotal data. Next year we see a number of FDA decisions for Qtern (saxa/dapa), ZS-9 and brodalumab. We also expect pivotal read-outs for Tagrisso (1st-line lung), Tralokinumab (asthma), roxadustat (anaemia in CKD), Lynparza (1st-line Ovarian) and the PACIFIC study (durvalumab in stage III NSCLC).

Quality of Earnings Improve Quickly – We show that the quality of earnings improves significantly by 2018 with only 6% of earnings coming from Externalisation revenues. We also show that if externalisation revenues were placed on 2x EPS, the rest of the business is currently trading on 22x 2017 EPS, but only 13x 2019 EPS, as we forecast a rapid reduction in externalisation revenues to just $400m in 2018.

AZN Looks Attractive on Multiple Metrics – In trying to value the long term growth of AZN we have calculated a number of valuation metrics in addition to using our proprietary valuation methodology. In our DCF, AZN is valued at £84. On a PEG ratio, AZN is the lowest in the sector at just 1.2x. Even after discounting future earnings, AZN is only trading on 12x 2021 EPS despite our expectation of double digit EPS growth in 2021.

Note: This initiation is also included within the "EU Pharmaceuticals - Opportunities Abound" report.