Pharmaceuticals giant AstraZeneca today became the latest company to count the cost of the COVID-19 coronavirus outbreak in China.
AstraZeneca, which last year overtook GlaxoSmithKline to become Britain’s biggest drugmaker by stock market value, admitted on Friday that coronavirus would have an impact on its 2020 earnings.
The Cambridge-based company said that sales were expected to increase by a “high single-digit to a low double-digit percentage” during 2020, with earnings per share – the amount of profit after tax divided by the number of shares in issue – growing by between 15%-19%.
It added: “All guidance assumes an unfavourable impact from China lasting up to a few months as a result of the recent novel coronavirus (Covid-19) outbreak.
“The company will monitor closely the development of the epidemic and anticipates providing an update at the time of the Q1 2020 results.”
City analysts had been pencilling-in growth of around 20-21% this year and, as a result, shares of AstraZeneca briefly fell by 5% before slightly recovering.
China is an increasingly important market for AstraZeneca which, with 17,000 employees there, is the biggest multinational pharmaceuticals company in the country. Around a fifth of the company’s earnings came from China in 2019 and were up some 35% on 2018.
AstraZeneca is one of the first major UK-listed companies to try to put a figure on the likely impact of the outbreak.
Pascal Soriot, the chief executive, said AZ has spent a lot of time trying to work this out and had decided to take a deliberately conservative approach in updating investors.
He told CNBC, sister channel to Sky News: “We have a relatively good understanding, at this stage, of the impact it could have and that’s why we felt we needed to include that in our guidance.
“Now of course we have to recognise that things are changing and we have to see how the epidemic develops, but we have included the impact of the coronavirus in our forecast, assuming it only lasts for a few months and improves over time.”
Asked why he was confident that the impact of the outbreak would only be for a few months, Mr Soriot replied: “Of course we have to be modest here and admit we don’t know, we can’t predict the future, but I have to say that the Chinese government has swung a lot of resources, a lot of effort, at controlling the disease as much as they can in the country.
“There has been a lot of work done, also, to control travel, to stop people from spreading the disease. And so in the Hubei region, Wuhan [the city where the disease first appeared] is really controlled and blocked to communications and to people travelling back and forth.
“This effort should have an impact over time and that’s why we believe that we’ll get past this epidemic.
“Remember, about 10 years ago, the H1N1 [swine] flu epidemic, we got past that one, too.”
Mr Soriot said that the virus led to a lower mortality than swine flu but that it was more contagious.
He added: “I would not say it’s totally controlled yet, but I would say that over the next two to three months, we would hope to see it come under control.”
The coronavirus update came as AstraZeneca delivered a mixed set of annual results.
Among the positives, full year sales rose by 10% to $24.4bn, with sales of AstraZeneca’s new medicines growing even more rapidly – by 59%. New medicines represented 42% of sales during the year.
This is important because, for many years, AstraZeneca was perceived by the City as too dependent on old blockbuster medicines whose profitability was hit as they lost patent protection and cheap generic copycat versions of those products came onto the market.
Mr Soriot, however, succeeded in convincing investors that the company’s pipeline of new products would more than make up for these over time. It was one reason why he was able, in 2014, to persuade them not to support US rival Pfizer’s £70bn takeover approach – a rare example of a FTSE-100 company seeing off a hostile bidder.
Doubters were convinced when in 2018, a year later than originally targeted, AstraZeneca reported a rise in quarterly sales for the first time since 2014.
Mr Soriot could point out with satisfaction today that the company has now notched up six consecutive quarters of sales growth and now has nine drugs with annual sales of more than $1bn each.
Of the three therapy areas in which the company has sought to specialise – oncology, cardiovascular, renal and metabolism (CVRM) and respiratory, it was the former which again stood out. Star performers again included Tagrisso, AstraZeneca’s lung cancer drug, whose sales rose by 79% during the year to hit $3.2bn.
Lynparza, a treatment for ovarian cancer, saw its sales rise by 85% to $1.2bn. And Imfinzi, a treatment for lung and bladder cancer, also achieved blockbuster status with sales of $1.5bn.
Yet in other areas Mr Soriot could also point to progress. Brilinta, AstraZeneca’s heart attack drug, grew sales by 20% to $1.6bn. And Farxinga, its diabetes treatment, saw sales rise by 11% to $1.5bn.
It all meant that full-year core operating profit, which is AstraZeneca’s preferred measure, rose by 13% to $6.4bn.
Those were the good points. On the downside, sales of some of the new medicines in the latest quarter fell short of expectations, including those of Tagrisso.
Adam Barker, healthcare analyst at stockbroker Shore Capital, said that, as well as the warning on coronavirus, the shares had also been hit by the fact that earnings per share had come in slightly below expectations due to the company spending more on research and development and in other areas.
But he said that, unlike some of its competitors, AstraZeneca deserved credit for at least trying to quantify how much coronavirus will cost it.
He added: “Given the strong run in AstraZeneca’s share price the shares are now arguably “priced for perfection” and so any sign of weakness will be taken negatively.”
He pointed out that, as a multiple of expected earnings, AstraZeneca’s shares now trade at a 40% premium to those of their peers.
That does mean that the shares may suffer the odd bad day.
However, given the company’s history over the last decade or so, it is a situation with which Mr Soriot will probably be comfortable.