AstraZeneca PLC (LSE:AZN) has been landed with a 'sell' rating from UBS, which says that the company's valuation is too high given the potential earn-out payment to partners.
UBS recognises that AZ has a deep pipeline which it continues to supplement with bolt-on M&A and it expects this to be highlighted at the pharma giant’s investor day next week (21 May).
“Our cautious stance reflects our view that near-term earnings must reflect the impact of both US Medicare Part D reform on oral oncology in 2025 and investments needed to execute the pipeline/drug launches,” UBS said.
The Swiss bank has revised its earnings forecast for AZ, predicting that its core earnings, also known as EBIT (earnings before interest and taxes), will be 4% lower than consensus estimates for 2025 and 6% lower for 2026.
UBS advises investors to consider AZ adjusted earnings, which better reflect the company's cash payments to partners for milestone achievements and royalties on drugs like Farxiga, Enhertu, Calquence, and Dato-DXd.
From 2024 to 2030, UBS expects the drug giant to make $10.5 billion in probability-adjusted future payments to partners for current and pipeline drugs, which would be $12.2 billion if considering 100% probability.
These payments affect the Anglo-Swedish group's earnings per share (EPS), with UBS's adjusted EPS forecast 21% lower than the company's core EPS for 2024 and 13% lower for 2025.
Sell with a 10,500p target price in UBS’s view.