German bank Berenberg reckons the pipeline at drugs giant AstraZeneca PLC (LON:AZN) is sufficiently strong to drive a return to growth beyond 2017/18.
Berenberg expects Astra to crank up the spending on research & development (R&D), starting in the second half of the current financial year, resulting in an 8% reduction to its core earnings per share (EPS) forecasts for 2017 and a 3% reduction in 2018.
“Taking our R&D spend up does hurt earnings in 2017 and 2018 but not thereafter. Importantly, we do not assume significant externalisation revenue or extraordinary other income beyond 2016, and it is likely the company will announce sufficient deals to offset the R&D expenditure, but until they are disclosed we do not model these items,” Berenberg explained.
In the near-term, the most important share price catalyst is the MYSTIC first-line lung cancer study of durvalumab and tremelimumab combination therapy, where results are expected in the first half of next year.
“We have peak sales for durvalumab/tremelimumab of US$5bn, but we risk weight by 75%. As a result, success for this drug (largely driven by MYSTIC) would add £2.23 to our £55 DCF [discounted cash flow-based valuation], whereas complete failure would drop the DCF by £6.91,” Berenberg said.
“Nevertheless, with the shares at £43.21 and some way off their £52 high of earlier in the year, we believe the market is pricing in a greater risk of MYSTIC failure,” it added.
While acknowledging that MYSTIC makes Astra a bit of a binary bet, it has retained its ‘buy’ recommendation.