EU Pharmaceuticals - Margins Set to Take Off
After years of disappointing margin progression, we provide evidence that EU Pharma is set to enter the sweet spot in the cycle. We show that years of disinvestment through the Patent Cliff preceded years of reinvestment as new products launched and R&D innovation surged. However, we show that R&D ratios now seem close to their peak and SG&A ratios appear to have already peaked driven by a shift to Specialty care. We show first signs of our thesis playing out & believe that AZN & NOVN are best placed to benefit.Reinvestment Complete – During the patent cliff there was disinvestment as the need to cut costs took precedence. Post the Cliff, we saw years of reinvestment in R&D behind the surge in innovation, and in SG&A behind new product launches. Despite top-line growth, Pharma margins have disappointed the market due to this reinvestment phase.
SG&A and R&D ratios at Peak – We show clear evidence that R&D ratios are likely to have peaked as they near 20% for the industry. SG&A looks to have peaked in 2016 and we believe the shift to Specialty will lead to multi-year cuts in SG&A. Specialty sales will be 67% of 2022 sales from 43% in 2010.
First evidence of our thesis - At the Q117 results we saw the first evidence that margins were starting to surpass expectations. We show that almost every company beat on sales but the beat at the EPS level was materially higher.
AstraZeneca is a holding company. Through its subsidiaries, Co. operates as a biopharmaceutical company engaged in discovering, developing, manufacturing and commercializing its pipeline of small molecule and biologic prescription medicines, including targeted business development through collaboration, in-licensing and acquisitions. Co. is focused on three main therapy areas: Oncology, Cardiovascular and Metabolic Diseases, and Respiratory. Co. is also selectively active in autoimmunity, infection and neuroscience. In addition, Co. works across small molecules, oligonucleotides and other drug platforms, as well as biologic medicines.
Provided by our team of experienced analysts, our work is idea driven, based on independence of thought, sector expertise, and firmly focussed on fundamentals and valuation.
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