US Edition AstraZeneca
£27.52 -37p
Questor says Sell
AstraZeneca posted a sparkling set of third-quarter results on Thursday, sending analysts scurrying away to upgrade their numbers.
Pre-tax profits rocketed by 24pc, on revenues up 5pc. On closer inspection, however, the results were flattered by a series of
one-off gains.
The company booked $152m (£92m) of sales of its nasal spray swine flu vaccine, as part of a $453m contract with the US government. Chief financial officer Simon Lowth said they were on track to deliver all 40m doses required by early next year, by which time swine flu could well be a fond memory.
Sales of AstraZeneca's high-blood-pressure treatment Toprol-XL also shot up by a staggering 110pc as the US health watchdog took two of its generic rivals off the market because of safety fears. Those have since come back on the market, however, so the benefit was short-lived.
There was good news on costs. AstraZeneca is incredibly efficient at cutting spending when needs must. Research and development costs in particular were down 16pc due to productivity improvements.
Margins subsequently rose to an extraordinary 44pc. The concern is that they are not sustainable.
Cholesterol drug Crestor was flying off the shelves in the third quarter, with sales up 30pc to $1.1bn, sending the product on its way to overtaking Nexium as the Anglo-Swedish group's biggest seller.
Crestor, however, faces the threat of losing patent protection before its time. AstraZeneca is due in court in the US in February to defend the drug against a patent challenge, in a world increasingly characterised by governments bearing down on pharmaceutical companies.
Even if it wins, over the next five years, AstraZeneca faces patent challenges to some of its leading drugs, including best-sellers Nexium, which treats ulcers, and antipsychotic drug Seroquel.
It is, of course, a fundamental part of business for pharmaceutical companies to lose patents on drugs. The difference this time is that they all seem to be coming at once and AstraZeneca does not have the pipeline to offset their loss.
The pipeline has improved this year but the company continues to encounter stumbling blocks.
Earlier this week, it pulled its lung cancer drug Zactima from regulatory clearance lists in the US and Europe following disappointing trial results.
Investors were also unnerved by suggestions that its heart drug Brilinta did not work so well in combination with high doses of aspirin.
AstraZeneca also faces the potential threat posed by healthcare reform in the US. The concern is that a more organised US system will stop overpaying for medical supplies.
Cash was used to help pay down debt, which stood at $3.2bn at the end of the quarter. This is very modest for such a cash generative company.
There were even murmurings that AstraZeneca could become an acquisition target, although these were speculative in the extreme.
Questor recommended holding on to the shares in February for the hefty dividend. Now is the time to sell before the competition from generics really starts to bite.
Standard Life
219p -0.8p
Questor says Hold
Many of the companies reporting on Thursday appeared to be whistling to keep their spirits up.
Among them was insurance and pensions group Standard Life, which sees signs of a return to the good times despite a gloomy set of numbers for the third quarter. Sales were just a touch below analyst forecasts as a result of a larger-than-expected decline in sales of pensions to large institutions, and sales of self investment personal pensions (SIPPs).
In the first case, some three-quarters of new business usually comes from corporate customers taking on new staff and bumping up salaries for their existing staff.
That has clearly not been happening in the past quarter – hence the dip in sales. Crucially, Standard Life has not been losing customers.
It is a similar story for SIPPs where Standard Life says it is doing plenty of business but the value of the pots of money customers are transferring into their SIPPs are smaller as a result of the decline in stock market values. (Remarkably, despite the recent rally, the daily average level of the FTSE All-Share in the first nine months of the year was 25pc lower than in the same period last year.)
Overall, new business sales were down 10pc, which is not bad for a UK-focused company in the current climate.
David Nish, who takes over as chief executive in January, remained cheery about the outlook.
His appointment seems to be a good one. Despite being the internal candidate, he is not considered part of the old guard having only started at Standard Life at the end of 2006.
The major challenge for Standard Life is the economic climate, over which it has no control. Put simply, while the UK remains in recession, fewer people will be able to buy its products.
Still, the shares are worth holding on to for the healthy 5.6pc dividend yield. That looks safe as Standard Life already boosted the interim dividend and has one of the strongest balance sheets of all the European insurers.
The shares are trading on almost 11 times next year's earnings.