Fitch: AstraZeneca Bucks Diversification Trend

Thu Mar 21, 2013 1:21pm EDT

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(The following statement was released by the rating agency) LONDON, March 21 (Fitch) Fitch Ratings says that AstraZeneca, faced with major US patent expiration in 2014 of its proton pump inhibitor Nexium and its asthma and COPD medicine Symbicort, has announced on its investor day its continued focus on pure pharmaceuticals. This leaves it in a higher risk position than many of its peers however also enables it to benefit from a potentially high reward. Its focus on pure pharma leaves AstraZeneca as the only big pure pharmaceuticals company in Europe. As the operating profitability in pharmaceuticals is typically between 20% to 25%, generally higher than in other healthcare areas, such as over the counter (OTC) and generics where operating margins typically only reach 15% to 20%, AstraZeneca's group core operating profit margin is expected to continue to be superior to that of many of its more diversified peers. AstraZeneca's operating margin stood at a high 37% in 2012, far higher than that of the more diversified pharmaceutical companies, such as Novartis or Bayer which reported a 2012 core operating profit margin of 27% and 14%, respectively. Its pure pharma focus however also leaves AstraZeneca with less stability in its sales, profit and cash flow generation compared to diversified peers as non-pharmaceuticals businesses tend not to be affected by patent expiration and thus add some stability to a companies' business. As opposed to its more diversified European peers GlaxoSmithKline, Bayer, Novartis, Sanofi and Roche, which are expected to report low-to mid-single digit organic sales growth over the next two years - supported by the generally lower growth but less volatile healthcare businesses - AstraZeneca is expected by Fitch to report negative organic growth for at least that time period. Different from many of its more diversified peers who through their offer of non-innovate pharmaceuticals products can establish themselves in emerging markets where consumers' out-of pocket payments tend to still be high and non-innovative products are often a more affordable solution, AstraZeneca is unable to benefit from this. Over the five years to 2011, the share of sales generated by pharmaceuticals companies outside ethical pharmaceuticals for Fitch-rated pharmaceuticals companies has increased to about 21% from 19% and this trend is expected to continue. Other major parts of AstraZeneca's strategic plan include a narrower focus in its pharmaceuticals R&D, on only three therapeutic areas (down from six) and a productivity increase via major restructuring. AstraZeneca's ratings are supported by its strong market positions within the pharmaceutical industry, its wide product and geographical diversification, high profitability, and its strong debt protection measures. Negative rating factors include upcoming patent expiration - putting pressure on AstraZeneca's sales and cash flow over the next few years. We published two special reports in January that discussed the main challenges for the sector and likely future trends. "Global Pharmaceuticals Sector and Companies Overview" and "Global Pharmaceuticals Peer Study" are both available at Contact: Britta Holt Director +44 20 3530 1335 Fitch Ratings Limited 30 North Colonnade London E14 5GN Roma Patel Analyst +44 20 3530 1465 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available at ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.