>ASTRAZENECA (EUROPEAN STOCK)

Fundamental risks to the fore

■ Focus to shift from short-term momentum to fundamentals
Much of the share price strength in recent months has been “momentum” driven in our opinion, given pipeline catalysts (Brilinta Phase III data, Onglyza approval) in recent months. From here, however, we see limited late stage clinical data to support further share price upside and expect the market to begin to re-focus on the company’s long-term fundamentals challenges (outlined below). Our PO of 2650p is c5% below the current share price. Underperform.

■ Long-term forecasts significantly below consensus
Our out-year EPS forecasts for AZN are c10-15% below consensus, driven by our more cautious stance on group sales progression (10-13E CAGR of -6% vs consensus -3%), as we assume new product launches are insufficient to offset significant expected generic competition. Importantly, we believe declining sales, predominantly driven by generic erosion of high-margin products, could result in a greater decline in operating profits, (MLe -9% 10-13E CAGR).

■ Crestor pivots approaching
Our 2014 forecast for Crestor of $5bn is substantially below consensus estimates of c$6.8bn (the $1.8bn difference is c7% of group sales). Upcoming newsflow represents asymmetric downside risk to consensus forecasts, in our opinion. Potential positives for Crestor which could theoretically expand its existing addressable patient pool include a label update for high CRP, approval of Certriad and a potential lowering of LDL targets. However, in our opinion, upside from these events is already largely assumed in consensus. Importantly, we remain cautious on the achievable sales potential in each and see downside risk to consensus should these potential positives disappoint. Importantly, potential negatives (upcoming patent trial and increasing longer term concerns over potential therapeutic substitution following Lipitor generic launch Nov 2011) represent exclusively downside risk to forecasts, in our opinion.

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