A million corporate lawyers each charging a million dollars a year are not going to add a single new compound to AstraZeneca’s roster of drugs, despite celebrations over its court victory in the US.
A clutch of generic drugmakers went to court to challenge the patent held on Crestor, a hugely profitable anti-cholesterol drug, by the Japanese manufacturer Shionogi. Astra has the licence to produce this and the uncertainty over the case had overhung the company’s share price.
Hence the 7.5 per cent jump in its share price yesterday. This is not going to add a cent to Crestor sales — $4.5 billion in 2009, $2.1 billion of this in the cholesterol-rich US — even if Astra’s staunch defence of its patents against the increasingly aggressive generics is encouraging. Generic versions of drugs such as Crestor tend to hit the market at about a fifth of the cost of the original.
The patent expires in 2016, but Crestor could come under pressure before then once Pfizer’s not-dissimilar Lipitor compound loses protection in 2011 and doctors switch to the cheaper generic equivalents.
On July 28, Astra will pass another important milestone as the US Food and Drug Administration rules on its Brilinta anti-clotting compound. The omens are positive, and this would provide the shares with another boost just ahead of interim figures — the bulls at Shore Capital believe Brilinta could be worth $3.6 billion at its peak in 2028. No one could accuse them of not taking a long-term view.
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But looking less far ahead, the falling number of new drugs coming to market has long worried analysts. A recent study from CMR International, part of Thomson Reuters, found that the proportion of total sales from drugs launched within the past five years has dropped to below 7 per cent, against 8 per cent in 2008. Astra and its peers are responding by trying to find new applications for existing compounds. Astra is also well-positioned in emerging markets, which currently account for about 13 per cent of its sales but are expected to grow to a quarter by 2016. It is second only to Pfizer in China. Astra is reviewing its costs base and has revamped its R&D efforts with the hiring of Martin Mackay from Pfizer and a target of coming up with two new medicines a year.
For any business with a 12-year development cycle, mundanities such as price-earnings ratio seem irrelevant. The shares have the support of a progressive dividend policy, which in this case translates into the same or more for at least five years, which offers a yield at today’s price of well over 5 per cent. Astra is also planning a £1 billion share buyback this year. The shares are attractive for that yield. Longer-term, though, the questions remain.
Northgate
Did it really take a new chairman and two years of economic hard times for Northgate to realise that it wasn’t a terribly good idea to have its UK business split into 20 different fiefdoms? Each with its own brand and management? Apparently so; and unpicking this will save £10 million a year, albeit at the cost of 150 jobs.
Northgate, supplier to white van man, is one of those businesses that manages to be in two or three wrong places simultaneously. The rental of vans, for removals, commercial use or whatever, is one of those blindingly obvious unofficial economic indicators that ought to be up there with the availability of taxi cabs.
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The company is heavily exposed to the Spanish economy and the building trade, RIP. Until April 2008 it was engaged in an aggressive spending programme to expand its vehicle fleet. Last year a desperate refinancing and rights issue managed to cut debt to a more manageable level, even if this is still two thirds of Northgate’s permitted banking ceiling.
Northgate has also reacted by cutting its vehicle fleet, both in the UK and Spain, and is benefiting from rising prices for its second-hand vehicles, realising a £700 profit on each sold in the UK as opposed to a loss last year.
Utilisation levels are now running just ahead of the target 90 per cent and the new chairman, stock market veteran Bob Mackenzie, has made it clear they will stay there, and if this means more vehicle sales, in his words, “so be it”.
In December, when this column last reviewed the stock, the price-earings ratio was a hefty 11. Now it is back to a more reasonable 6.7. Optimists on the UK economy might regard this as a buy signal, but there will not be a lot of them. Hold.
Resolution
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When Clive Cowdery bought Friends Provident for £1.9 billion in 2009, the insurer was largely unloved and most institutions were happy to offload their shares. Sceptics, and Mr Cowdery does tend to attract widely contradictory views, thought the true challenge would be the next deal. He claimed to have any number in his sights, but these remained elusive.
Last month Resolution agreed to pay £2.75 billion for Axa’s UK life business in a deal that is complex even by the standards of the insurance industry. The shares were suspended until the arrival of the prospectus. Yesterday it arrived.
Having been suspended at 60p, the shares promptly surged as much as 14 per cent to 68.4p. The reverse takeover would more than double the size of Resolution’s existing business, whose policies have an embedded, or underlying, value of about £2.5 billion. Buying Axa in the UK will create a £6 billion company, on the way to realising Mr Cowdery’s ambition to build a £10 billion insurer by 2013.
The expected share price after the rights issue is 242.2p, so even allowing for dilution, the current price is a long way from fully taking account of the size of the new company. Not for the timid or those of limited means, but for members of the Cowdery fan club, the shares look worth having.
HMV
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Echoes of the death of Diana, Princess of Wales: HMV yesterday blamed the World Cup for reducing its sales volumes. Some will recall that the Princess’s death was blamed by a seller of sofas for a similar sales decline, an excuse then widely adopted elsewhere. The football tournament may have postponed the release of CDs, DVDs and games that HMV sells, but sales will be made up in due course. Let us hope not too many corporates are now tempted to blame events in South Africa for their own failings.