M4 BARRON’S July 12, 2021
EUROPEAN TRADER
A
straZeneca swiftly rolled out
its Covid-19 vaccine, making
more than 500 million doses for
more than 165 countries—and
did it at cost, for zero profit.
But the publicity hasn’t all been good
for the Anglo-Swedish drugmaker. Rare
side effects and production delays at-
tracted criticism, even though the issues
have largely been resolved.
Investors should look past this, and
remember that AstraZeneca (ticker:
AZN), which is listed in London and has
American depositary receipts trading in
the U.S., is also a specialist in cancer
treatments, and it supplies medicine for
a host of other diseases. It has a strong
pipeline, an increasing number of $1
billion blockbuster drugs and, with Eu-
ropean Union and U.S. approval of its
acquisition of Alexion Pharmaceuti-
cals (ALXN), a promising new rare-dis-
eases division.
A handful of new treatments could lift
the company’s bottom line and stock
price higher in the coming years. Astra-
Zeneca’s “impressive” revenue and profit
trajectory is compelling, relative to that of
its European pharma peers, analysts at
Jefferies wrote in a research note.
Analysts at research firm Third Bridge
say AstraZeneca is the poster child for
big pharma turnarounds, making it a
good time to buy the stock. UBS last
month lifted its share price target to 92
pounds sterling ($126.65) from £80, or
about 6% above a recent value of £86.78.
The shares are down more than 10%
since a recent peak in July last year, in
part because investors haven’t digested
its $39 billion takeover of Alexion. Astra-
Zeneca trades at 19 times forward earn-
ings, relatively cheap versus its recent
history—although still at a premium to
Pfizer (PFE) and Merck (MRK).
The company’s turnaround has been
led by CEO Pascal Soriot, after fending
off a $69 billion hostile bid from Pfizer
seven years ago. Soriot had pledged to
nearly double the drugmaker’s sales to
$40 billion by 2023. “We invested mas-
sively into R&D to re-energize the com-
pany and increase productivity,” Marc
Dunoyer, AstraZeneca’s chief financial
officer, tells Barron’s.
Soriot looks on track to meet his sales
pledge after AstraZeneca delivered dou-
ble-digit revenue growth over the past
two years. Oncology is now the drug-
maker’s best-performing and fastest-
growing division, with total revenue hav-
ing increased by more than a fifth, to
$11.5 billion in 2020, boosted by $4.3 bil-
lion in sales of its blockbuster lung can-
cer treatment Tagrisso. Oncology repre-
sented 43% of overall year-to-date
revenue in 2020, compared with 38% for
the same period a year earlier.
The company now boasts nearly 10
blockbusters, each with annual sales of
almost $1 billion or more, and has 22
drugs in Phase 3 clinical trials.
Combined with Alexion, AstraZeneca
predicts, it will deliver double-digit aver-
age annual revenue growth through 2025
and double-digit accretion in core earn-
ings per share for the first three years.
The bulk of Alexion’s $6 billion in annual
sales comes from Soliris, which treats a
rare blood disorder.
In April, Tagrisso was approved in
China for the treatment of early lung can-
cer, becoming the first such drug to re-
ceive approval in that country. “China
could become a very large market for rare
diseases, and when the market does open
up, we are very well positioned to expand
there,” Dunoyer says.
“There’s the vaccine saga, which has
presented a bit of an overhang on the
stock as we have seen some knee-jerk
reactions to the vaccine news. On the
other hand, it’s important to realize the
underlying fundamentals of AstraZeneca
are strong,” says Sebastian Skeet, an ana-
lyst at Third Bridge.B
By Lina Saigol
EMERGING MARKETS
China’s Real Estate
Bonds Are for the Brave
T
ech stocks are not the only
Chinese assets that have
crashed lately.
Spreads on B-rated corpo-
rate bonds, which run inversely to price,
have jumped by seven percentage points
over the past month or so, says Paul
Lukaszewski, head of Asia Pacific
corporate debt at Aberdeen Standard
Investments.
Three-year paper is paying about 18%
interest, higher than during most of last
year’s Covid-19 panic. The Kraneshares
CCBS China Corporate High Yield
Bond USD Index exchange-traded
fund (ticker: KCCB) is down 1.5% over
the past two weeks, a plunge by fixed-
income standards.
“Outside of Asia, credit markets are
priced for perfection,” Lukaszewski
says. “In China, it’s priced for a melt-
down.”
That may spell golden opportunity in
a yield-starved world. Or things could
get still worse before they get better.
Real estate developers are the heart
of China’s corporate bond market, and
its problems. About 80 of them have
issued hard-currency debt worth $200
billion or so. Maintaining stable prices
for housing, which drives almost 30%
of the economy, is a perennial concern
for Chinese authorities.
This year, they have aggressively
tightened credit and laid down “three
red lines” for builders’ debt ratios.
“They are trying to block the financial
channel for developers,” says Tracy
Chen, a portfolio manager for global
credit at Brandywine Global.
That is spreading fear in a market
that’s not the world’s most transparent.
“One developer is punished for buying
too much land while another for buying
too little,” Lukaszewski says. “Investors
are making up reasons to sell.”
One company’s problems are real
enough: China Evergrande Group
(3333.Hong Kong), No. 2 builder in
China and No. 1 in the world in leverage.
It has been shedding assets and rapidly
selling apartments to raise cash to meet
the red-line targets. Ratings agency
Fitch downgraded Evergrande anyway,
from B+ to B on June 22. Some of its Chi-
nese banks have reportedly cut it off.
A rescue for Evergrande would buoy
the rest of the market, predicts Omo-
tunde Lawal, head of emerging markets
corporate debt at Barings.
“Evergrande is probably too big to
fail,” she says. “I’m in the camp that
there’s value at current prices.”
Still, she is concentrating on more
solid, BB-rated firms like CIFI Hold-
ings Group (884.Hong Kong) or Shi-
mao Group Holdings (813.Hong Kong),
whose short-term bonds pay about 5%,
not double digits.
Samy Muaddi, lead manager for
emerging markets corporate bonds at
T. Rowe Price, thinks that Beijing might
let Evergrande and up to a dozen others
default. “I was a contrarian buyer of
China credit during past cycles,” he
says. “This time, they’re determined to
squeeze out moral hazard.”
What is too big to fail is the Chinese
property sector as a whole. Xi Jinping &
Co. want to keep a floor under existing
homeowners no less than a ceiling for
aspiring ones, and constantly tweak
credit accordingly.
The State Council, China’s equivalent
of a cabinet, may have signaled the next
dovish tilt on July 8. It announced that
bank reserve ratios, a key mechanism
for controlling credit, may be trimmed
“as appropriate to intensify support for
the real economy.”
That bears close watching, at least for
hungry bond investors.
“We haven’t bet the farm on Chinese
developers,” Aberdeen’s Lukaszewski
says. “But we are long and adding be-
cause risk/reward is so favorable.”B
By Craig Mellow
AstraZeneca’s Pipeline
Looks Promising