Big pharma duo advise caution

Despite cautionary outlook statements by both AstraZeneca (AZN) and Smith and Nephew (SN.), investors cheered shares in the latter, while AstraZeneca shares lingered in the doldrums.

AstraZeneca

"The coming years will be challenging for the industry and for the company, as its revenue base transitions through a period of exclusivity losses and new product launches," said pharmaceutical giant Astrazeneca as it published its 2011 full-year results.

Additionally, the company lowered its mid-term guidance contribution from the pipeline to between $2 billion (£1.26 billion) and $4 billion.

Shares in the company moved lower on the statement.

"While the further expected losses of market exclusivity make for a challenging 2012 outlook, we remain committed to a long-term, focused, R&D-based strategy," said chief executive David Brennan.

Mike Mitchell, analyst at Seymour Pierce, voiced: "In our opinion, the pipeline remains thin and we remain less-than-convinced of the R&D engine." He had a 'reduce' recommendation on the stock.

The company announced a new restructuring programme involving 7,300 job losses - significantly higher than the figure of 3,000 speculated by the weekend press.

A share-buy-back programme worth $4.5 billion was also announced.

Savvas Neophytou, analyst at Panmure Gordon, said the negative comments overshadowed the 2% increase in revenues for the year. She had a 'buy' rating on the stock.

However, the company warned that revenues in 2012 would be "adversely affected by government interventions on pricing, and ongoing generic competition, including the anticipated loss of market exclusivity for Seroquel IR and Atacand in global markets, as well as for Crestor in Canada", anticipating a "constant currency revenue decline for 2012 in the low double-digit range".

Shares in the company are trading on a 2012 price to earnings ratio of nine times, a 33% discount to GlaxoSmithKline (GSK).

Collins Stewart analyst James Dawson stressed that while the stock seemed "cheap", consensus still had to factor in the implications for 2013 and 2014 earnings. He downgraded the stock to 'reduce'.

Smith & Nephew

Specialty pharmaceutical group Smith & Nephew echoed AstraZeneca's concerns about the outlook for 2012.

"We expect that the macroeconomic climate will continue to influence both patient and payer behaviour and, as a result, it seems likely that tough market conditions will persist throughout the year ahead," the company said. Despite these comments, the company expects to achieve a "modest increase" in trading profit margin in 2012.

In its full-year statement, the company confirmed revenue growth of 7.8% year-on-year.

Additionally, the company revealed that the previously-announced $150 million per annum cost savings would be achieved through general administration expenses, along with a 7% reduction in the global employee base to be phased across a three-year period.

Shares in the company rose more than 5% on the news.

Neophytou believes that the company may also be a potential merger and acquisition (M&A) target. "If the consumer and macro environment in the US do not improve for many years, it is our strong view that will trigger M&A and note that Smith & Nephew has not been short of suitors in recent years," she commented. She had a 'buy' rating on the stock.

Dawson upgraded the stock to a 'buy' following the announcement. "We believe that margin progress in 2012 is slightly earlier than expected by the market and a more focused sales approach is encouraging," he said.

Smith & Nephew currently trades on 2012 price to earnings ratio of about 12 times.

George Godber of Matterley Asset Management explains why AstraZeneca's stock is undervalued and what the company might do with its bumper cash balance in: Can AstraZeneca continue to deliver?