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Coverage Initiation: AstraZeneca (AZN)
AstraZeneca (AZN) was formed in 1999 by the merger between Astra AB of Sweden and Zeneca Group PLC of the United Kingdom. Astra was founding in 1913 and, at the time of the merger, it engaged in the research, development, manufacture, and marketing of pharmaceutical products, primarily in the gastrointestinal, cardiovascular, respiratory, and pain control areas. The company also marketed other pharmaceutical products, including anti-infective products, and operated Astra Tech, a medical devices group. Zeneca, meanwhile, was created in mid-1993, when Imperial Chemical Industries (founded in 1926) spun off three of its businesses (Pharmaceuticals, Agrochemicals, and Specialties) to form Zeneca. The new entity engaged in the research, development, manufacture, and marketing of pharmaceuticals, with a focus on the cancer, cardiovascular, central nervous system, respiratory, and anesthesia areas. It also produced agricultural chemicals and specialty chemicals, and provided disease-specific healthcare services.
Today, AstraZeneca discovers, develops, manufactures, and markets prescription medicines in the cancer, cardiovascular, gastrointestinal, infection, neuroscience, and respiratory and inflammation areas. It employs more-than 61,000 people in over 100 countries. A large number of its employees, however, are located in the United Kingdom, Sweden, and North America.
A major participant in the pharmaceutical field, AstraZeneca has to contend with a myriad of regulations across all of the markets it serves. These span from regulations about its research facilities to the vetting of potential product candidates before they can be sold to the quality controls surrounding its production facilities. The company must spend vast sums to ensure it complies with all of the appropriate regulations. If it does not, the impact could quickly move from the financial realm to the public relations arena—where a “black eye” can take a long time, and a great deal of money, to heal. This latter risk is also true of product recalls, particularly if customers are hurt by AstraZeneca’s products.
The drug industry is also research intensive. Around a quarter of the company’s staff are dedicated to research and development, and in fiscal 2010 the company spent more than $4 billion in its search for new and improved products. These costs are mandatory in this field if a company wants to remain competitive. Major drug discoveries are protected by patents with limited life spans and, at times, one or two products can make or break a company’s financial performance. There are, in fact, significant legal costs associated with protecting patents. Moreover, it is important for pharmaceutical companies to have a constant flow of new drugs to replace those that are losing patent protection, since the revenues earned from a drug generally fall precipitously after the loss of patent protection. At the end of 2011, the company’s major drugs included Crestor, Seloken/Toprol-XL, Atacand, Nexium, and Synagis.
Income-oriented investors should note that while AstraZeneca has a long history of returning profits to shareholders via dividend payments, it is a foreign company. As such, the dividends may be subject to withholding taxes. Moreover, dividend policies are generally different in Europe—the company pays dividends of unequal size two times a year. While the dividend has marched steadily higher since 2003, there is less of a stigma attached to dividend cuts in Europe.
Although AstraZeneca has done a good job of increasing its top line since its founding via the merger of Astra and Zeneca, the company, like many of its peers, is facing a major challenge in the form of patent expirations. Interested Value Line subscribers should monitor Value Line’s quarterly reports on AstraZeneca, while keeping an eye out for Supplemental reports covering late-breaking news. Right now, particular attention should be paid to the company’s patent expirations and its pipeline of new products.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.