Goldman Sachs Downgrades AstraZeneca To Sell, Cites High Pipeline Expectations

The valuation of AstraZeneca plc (ADR) AZN shares “skews the risk-reward against investors,” Goldman Sachs’ Keyur Parekh said in a report. The analyst downgraded the rating for the company from Neutral to Sell, while reducing the price target from 4,400p to 3,700p.

Expectations For 2016-2018

In view of AstraZeneca’s underlying cash generation, existing leverage and commitments to capex and dividend, there seems to be limited balance sheet flexibility to undertake any big M&A between 2016 and 2018.

Analyst Keyur Parekh elaborated that the underlying cash generation indicates that the company would need to raise about $5-$8bn of cash during 2016-2018. This would probably be done through asset sales, incremental out-licensing or debt raising, while the cash would be used to fund AstraZeneca’s existing commitments to M&A, dividends and capex.

Looking Ahead To 2020

The current long-term consensus expectations to 2020 appear “overly optimistic,” Parekh commented. The GS revenue estimate is 10 percent below consensus, while the EPS estimate is 25 percent below.

“We also see risks to 2020 company consensus revenue estimates for Brilinta (we are 46% below) and its diabetes portfolio (we are 18% below). Consensus also currently models an 88% flow-through on AZN’s incremental product revenues between 2015-2020 to operating margins, which we view as optimistic (GSe 73%),” the analyst wrote.

Around 70-75 percent of the company’s 2020 revenue is likely to be contributed by primary care products, “thus requiring continued SG&A support,” Parekh said. He added that AstraZeneca’s pipeline would probably need substantial R&D investments in the near term, which would restrict operating margin expansion.