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Dividend Stocks

AstraZeneca’s pipeline is emerging as one of the strongest in the drug group, and the company is developing several key products that holds blockbuster potential

Business Strategy & Outlook

AstraZeneca has built its leading presence in the pharma and biotech industry on patent-protected drugs and a developing pipeline that adds up to a wide moat. The replenishment of new drugs is offsetting the past patent losses on gastrointestinal drug Nexium and cholesterol reducer Crestor, and the company is well positioned for growth. AstraZeneca’s pipeline is emerging as one of the strongest in the drug group, and the company is developing several key products that hold blockbuster potential. In particular, the company’s recently launched cancer drugs Tagrisso and Imfinzi are well-positioned based on leading efficacy in hard-to-treat cancers. These drugs should also carry strong pricing power, driving the potential to expand Astra’s margins. Also, Astra is well-positioned in the respiratory and diabetes spaces, but these areas tend to have poor pricing power relative to cancer drugs.

In addition to internal development, AstraZeneca has aggressively pursued acquisitions, with mixed results. The ZS Pharma acquisition yielded an interesting hyperkalaemia drug, but delays in getting the drug to the market have been concerning. However, the partial stake in Acerta looks to be developing well with new blood cancer drug Calquence, and joint development with Daiichi Sankyo on cancer drug Enhertu looks promising. Also, the recent acquisition of Alexion looks like a solid strategic move done at a reasonable price. As Astra’s next generation of drugs launch, there are expected operating margins to improve based on the strong pricing power of the new drugs and the operating leverage the firm should attain as the new drugs reach critical mass. Also, as the new drugs launch, Astra is reducing the asset divestiture strategy it employed to help bridge the massive patent losses facing the firm over the past few years until the newer drugs were ready. While the asset sales helped prop up earnings and support the dividend during a challenging time, the strategy is not maintainable. As new drugs gain traction, Astra will likely continue to reduce the asset sales, which is strategically sound but will likely create a minor headwind to earnings growth.

Financial Strengths

Astra continues to generate robust cash flows, and the firm’s balance sheet is in solid shape, closing 2021 with debt/EBITDA of close to 4 times, a bit higher than normal due to the recent Alexion acquisition. While the acquisition added significant debt, it is expected the strong acquired drugs to produce robust cash flows to quickly pay down the acquisition-related debt. A projected debt/EBITDA ratio of 1.0 times by 2024 with the cash flow derived from acquired drugs and the robust sales growth of Astra’s other drugs.

Bulls Say

  • The company is expanding its oncology presence with several important pipeline products. In particular, the company’s EGFR drug Tagrisso holds major blockbuster potential in lung cancer.
  • The management team is focusing the pipeline toward unmet medical need, which should increase the odds of success and bring strong pricing power for the new drugs.
  • AstraZeneca has a large presence in emerging markets and should benefit from these markets’ fast growth prospects.

Company Description

A merger between Astra of Sweden and Zeneca Group of the United Kingdom formed AstraZeneca in 1999. The firm sells branded drugs across several major therapeutic classes, including gastrointestinal, diabetes, cardiovascular, respiratory, cancer, and immunology. The majority of sales come from international markets with the United States representing close to one third of its sales.

 (Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Global stocks

Despite Recent Litigation Headwinds on Zantac, GSK Remains Well Positioned for Earnings Growth

Business Strategy & Outlook

As one of the largest pharmaceutical and vaccine companies, GSK has used its vast resources to create the next generation of healthcare treatments. The company’s innovative new product lineup and expansive list of patents protected drugs create a wide economic moat. The magnitude of GSK’s reach is evidenced by a product portfolio that spans several therapeutic classes. The diverse platform insulates the company from problems with any single product. Additionally, the company has developed next-generation drugs in respiratory and HIV areas that should help mitigate both branded and generic competition. 

The GSK to be a major competitor in respiratory, HIV, and vaccines over the next decade. On the pipeline front, GSK has shifted from its historical strategy of targeting slight enhancements toward true innovation. Also, it is focusing more on oncology and the immune system, with genetic data to help develop the next generation of drugs. The benefits of these strategies are showing up in GSK’s early-stage drugs. This focus will improve approval rates and pricing power. In contrast to respiratory drugs, treatments for cancer indications carry much strong pricing power with payers. From a geographic standpoint, GSK is strategically branching out from developed markets into emerging markets. Its vaccine segment positions the firm well in these price-sensitive markets. While this strategy is likely to create some challenges, like the potential legal violations that arose in early 2013 in China, the fast-growing emerging markets will help support long-term growth and diversify cash flows beyond developed markets. GSK’s decision to divest its consumer business will likely unlock value over the long run. GSK divested its consumer group (called Haleon) in July 2022. Given the strong valuations of consumer healthcare companies, this unit will yield a stronger valuation than what is implied within the GSK structure before the divestment.

Financial Strengths

GSK remains on fairly stable financial footing, with debt/EBITDA at 2.8 as of the end of 2021 and with Haleon taking on close to GBP 10 billion of GSK’s debt, the remaining GSK balance sheet is improved. With the improving balance sheet and steady projections of cash flows, the GSK will increasingly make more acquisitions to augment its internal research and development pipeline. Additionally, with the divestment of the consumer division in July 2022, the new dividend of GSK to be secure and likely grow at a pace similar to earnings over the next five years.

Bulls Say

  • GSK’s next-generation respiratory drugs and HIV drugs look poised for strong growth over the next five years. 
  • GSK faces relatively minor near-term patent losses, setting up steady long-term growth.
  • The firm’s well-positioned Shingrix vaccine should support strong long-term growth based on excellent efficacy and limited competition.

Company Description

In the pharmaceutical industry, GSK ranks as one of the largest firms by total sales. The company wields its might across several therapeutic classes, including respiratory, cancer, and antiviral, as well as vaccines. GSK uses joint ventures to gain additional scale in certain markets like HIV.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Dividend Stocks

Invesco Will See Market Losses and Outflows as Long as Equity and Credit Markets Are Declining

Business Strategy & Outlook

Invesco had for a long time been a top pick for us among the U.S.-based asset managers one can have generated solid organic AUM growth (of 1.7% annually on average during 2008-17) and having a broadly diversified platform (including a niche ETF product portfolio with Power Shares ETF operations, which were rebranded as Invesco ETFs in 2018), despite generating below-average levels of operating profitability (primarily because of the costs associated with its more retail-centric distribution platform). The confidence in the firm has started to waver, though, in early 2018 when management lowered expectations for its fee realization rate, which had a dampening effect on the company’s ability to lift its margins. The company also bungled the messaging on its late 2018 purchase of Oppenheimer Funds, which should have improved its organic growth, realization rate, and profitability profiles. None of which happened, though, as the firm’s organic growth profile deteriorated (with Invesco posting negative 4.5%, 3.2%, and 1.8% growth rates in 2018, 2019, and 2020, respectively), the firm’s realization rate fell from 0.416% in 2017 to 0.371% in 2020 (and 0.347% in 2021), and adjusted GAAP operating margins declined from 26.8% in 2017 to 20.4% in 2020 (and while margins did bounce back to 25.0% last year, they are expected to stay in a 20%-22% range during 2022-26). 

About the same time that management was lowering expectations for fees, price/earnings multiples for the group started to bifurcate between the haves—firms like BlackRock, T. Rowe Price, and Cohen & Steers that were capable of generating above-average organic AUM growth and maintaining above-average margins—and the have-nots—firms like Invesco, Franklin Resources, Affiliated Managers Group, and Janus Henderson Group—that were expected to struggle to do both or that had fallen into a pattern of poorer performance and positioning. While cautiously optimistic about Invesco over the past year, though, as the firm has put up a nice string of positive flows, the market downturn, ongoing fee compression, and rising costs are going to keep a lid on margin gains in the near to medium term.

Financial Strengths

Invesco entered 2022 with $2.1 billion of debt on its books, composed of $600 million of 3.125% notes due November 2022, $600 million of 4.000% notes due January 2024, $500 million of 3.75% notes due January 2026, and $400 million of 5.375% notes due November 2043. The company also has a $1.25 billion floating-rate credit facility (maturing in April 2026) at its disposal. During the second quarter, the firm paid down its debt due in November 2022, closing out the period with $185 million outstanding on its credit facility. Should the firm close out the year with results, it would enter 2023 with a debt/total capital ratio of 9%, a debt/EBITDA ratio of 1.2 times, and an EBITDA interest coverage ratio of just over 15 times. While Invesco has traditionally dedicated much of its excess cash to seed investments, dividends, and share repurchases, the issuance of $4.0 billion of 5.9% perpetual noncumulative preferred stock as part of its financing of the 2018-19 Oppenheimer Funds acquisition is eating up cash, as the firm pays out $236 million annually to service the interest obligation. The suspect that the size and scope of the Oppenheimer Funds deal means that future deals are likely to be smaller, bolt-on acquisitions aimed at plugging holes in the firm’s product mix and/or geographic reach. After cutting the company’s quarterly dividend by 50% to $0.155 per share at the start of the second quarter of 2020, the firm raised it 10% to $0.17 per share during 2021 and then by another 10% in early 2022 to $0.1875 per share. Even so, one doesn’t expect the dividend to return to pre-pandemic levels for some time, with the firm likely to maintain a payout ratio of 30%-35% longer term. One also does not expect much in the way of share repurchases in the near term unless the shares are trading at a significant discount to intrinsic value.

Bulls Say

  • The Oppenheimer Funds deal lifted AUM closer to the $1.5 trillion mark, putting Invesco on a slightly better footing with industry giants like BlackRock and Vanguard, each of which oversees more than $5 trillion. 
  • Invesco’s organic AUM growth had turned positive for more than a few quarters, with the firm picking up $12.8 billion in net inflows on average quarterly from the third quarter of 2020 to the first quarter of 2022. 
  • Oppenheimer Funds’ slightly higher AUM realization rate should help offset some of the impact of industry wide fee compression on Invesco’s top line.

Company Description

Invesco provides investment-management services to retail (65% of managed assets) and institutional (35%) clients. At the end of July 2022, the firm had $1.449 trillion in assets under management spread among its equity (48% of AUM), balanced (5%), fixed income (22%), alternative investment (14%), and money market (11%) operations. Passive products account for 32% of Invesco’s total AUM, including 57% of the company’s equity operations and 13% of its fixed-income platform. Invesco’s U.S. retail business is one of the 10 largest non-proprietary fund complexes in the country. The firm also has a meaningful presence outside the U.S., with close to one third of its AUM sourced from Canada (2%), the U.K. (4%), continental Europe (11%), and Asia (15%).

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Global stocks

Lilly’s Robust Pipeline and Currently Marketed Portfolio Set Up Industry Leading Growth

Business Strategy & Outlook

Eli Lilly’s innovative culture and strong financial commitment to developing the next generation of drugs set the company apart from its peers and fuel its long-term growth. Following a very steep patent cliff in 2014, Lilly’s growth prospects are improving as the company is launching several new blockbusters and patent losses are fading. Lilly’s internal pipeline is well positioned to mitigate the patent losses during the next decade. The company tends to spend low to mid-20% of its sales on financing the development efforts of new drugs, much higher than the high-teens industry average. The robust pipeline is a result of Lilly’s strong commitment to research. The diabetes drugs Trulicity and Jardiance and immunology drug Taltz along with cancer drug Verzenio hold the highest sales potential of Lilly’s currently launched drugs. Further, pipeline drugs lebrikizumab (atopic dermatitis), mirikizumab (immunology), tirzepatide (diabetes) and donanemab (Alzheimer’s) hold major blockbuster potential. Lilly’s strong entrenchment in insulin production should also help the company deal with patent losses. 

Unlike traditional drugs, Lilly’s insulin drugs are very hard to copy by generics and create barriers to entry for non insulin producers because of the large up-front investments needed to create scale efficiencies. Further, Lilly’s longer acting biosimilar insulin should help the company secure its market share. Additionally, a new weekly insulin in late-stage development offers another avenue of growth in this mature market. The company is taking a hard look at its bottom line. Through a combination of cost savings and expected top-line growth, Lilly aims to expand operating margins over the next several years, which is achievable. Lilly expects to increase its gross margin through productivity initiatives and greater capacity utilization. Overall, the strong traction of recently launched high-margin drugs in immunology and oncology as supporting the overall profitability gains.

Financial Strengths

With strong cash flows derived from a stable and diversified product portfolio, Eli Lilly remains on solid financial footing. The company’s debt/EBITDA level will fall from close to 2.1 times in 2021 to close to 1.5 times by 2023. Also, the debt/capital ratio will fall from close to 65% in 2021 to 58% in 2023 as cash flows accrue over the years. With its strong growth prospects, one doesn’t expect Lilly will need to make any major acquisitions to drive growth. Nevertheless, tuck-in acquisitions will augment growth for the company over the next decade.

Bulls Say

  • Lilly is developing a new Alzheimer’s drug (donanemab) that could become a major blockbuster, especially because the FDA appears to have a lower threshold for accelerated approval for this disease.
  • Lilly’s cancer drug Verzenio reported strong data in early-stage breast cancer, opening up the potential to be the first CDK 4/6 drug to launch in this multi-billion-dollar market.
  • Lilly is increasing its focus on developing drugs for unmet medical indications in neurology and oncology. The strategy should improve the success rate at the FDA and drive strong pricing power.

Company Description

Eli Lilly is a drug firm with a focus on neuroscience, endocrinology, cancer, and immunology. Lilly’s key products include Verzenio for cancer; Jardiance, Trulicity, Humalog, and Humulin for diabetes; and Taltz and Olumiant for immunology.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Global stocks Shares

Merck’s Current Portfolio Looks Well Positioned for Growth in the Near Term

Business Strategy & Outlook

Merck’s combination of a wide line-up of high-margin drugs and a pipeline of new drugs should ensure strong returns on invested capital over the long term. Further, following the divestment of the Organon business in June 2021, the remaining portfolio at Merck holds a higher percentage of drugs with strong patent protection. On the pipeline front, after several years of only moderate research and development productivity, Merck’s drug development strategy is yielding important new drugs. Merck’s new products have mitigated the generic competition, offsetting the recent major patent losses. In particular, Keytruda for cancer represents a key blockbuster with multi-billion-dollar potential: It holds a first mover advantage in one of the largest cancer indications of non-small cell lung cancer with excellent clinical data. Also, the new cancer drug combinations will further propel Merck’s overall drug sales. However, the intense competition in the cancer market with several competitive drugs likely to report important clinical data over the next couple years in earlier stage cancer settings. Other headwinds include generic competition, notably to diabetes drug Januvia, likely to intensify in 2023. After several years of mixed results, Merck’s R&D productivity is improving as the company shifts more toward areas of unmet medical need. Owing to side effects or lack of compelling efficacy, Merck experienced major setbacks with cardiovascular disease drugs anacetrapib, Tredaptive, Rolofylline, and TRA along with Telcagepant for migraines. Safety questions ended the development of osteoporosis drug odanacatib. Despite these setbacks, Merck has some solid successes, including a successful launch for its PD-1 drug Keytruda in oncology. Following this success, Merck is shifting its focus toward areas of unmet medical need in specialty-care areas, and Keytruda is leading this new direction. Keytruda’s leadership in non-small cell lung cancer will be a key driver of growth for the company over the next several years.

Financial Strengths

Merck remains on solid financial footing. The company closed 2021 with debt/capital of 46%, and strong cash flows expected over the next several years should further strengthen the balance sheet. Also, with the spinoff of Organon, Merck received a one-time payment from Organon of $9 billion. Merck redeployed this capital through the acquisition of Acceleron to help fortify its late-stage pipeline. Merck has signalled a strong willingness to make acquisitions, and historically it has tended to make several bolt-on acquisitions each year. Given that Merck hasn’t made any major acquisitions since the Schering-Plough deal in 2009, it will make a larger acquisition over the next two to three years. Beyond acquisitions, the steady future dividends, supported by a payout ratio of close to 50% relative to adjusted earnings per share.

Bulls Say

  • Keytruda looks best positioned in the immuno-oncology landscape, buoyed by a first-mover advantage in the important indication of first-line non-small cell lung cancer.
  • The growth in Merck’s high margin cancer drugs should help expand the company’s overall operating margin.
  • Merck supports a strong dividend yield that looks secure based on a wide diversified portfolio of drugs.

Company Description

Merck makes pharmaceutical products to treat several conditions in a number of therapeutic areas, including cardiometabolic disease, cancer, and infections. Within cancer, the firm’s immuno-oncology platform is growing as a major contributor to overall sales. The company also has a substantial vaccine business, with treatments to prevent hepatitis B and pediatric diseases as well as HPV and shingles. Additionally, Merck sells animal health-related drugs. From a geographical perspective, just under half of the firm’s sales are generated in the United States.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Dividend Stocks

Package Volume Normalization Accelerating for FedEx; Margins Facing Renewed Pressure

Business Strategy & Outlook

Overnight delivery pioneer FedEx is one of three large national carriers that dominate the for-hire small-parcel delivery landscape—FedEx and UPS are the major U.S. incumbents, while DHL Express leads Europe. FedEx is also the largest U.S. less-than-truckload carrier, which helps forge sticky relationships with retail and industrial shippers on the package side. Rival UPS has been around much longer in the U.S. ground market, forging a density advantage and higher margins, but FedEx has gradually enhanced its ground positioning over the past decade, with help from its speed advantage over UPS and capacity investment. Leading up to the pandemic, FedEx’s margins grappled with heavy network investment, the gradual mix shift to lower-margin B2C deliveries, and TNT integration outlays. That said, the pandemic-driven e-commerce shift and related surge in residential package deliveries, coupled with an increase in pricing power (tight industry capacity), drove a solid uptick in profitability for ground, express, and freight.

Material labour constraints and wage inflation emerged in fiscal 2022, setting margins back, especially at ground. Additionally, package volumes are facing normalization of business-to-consumer volumes, retailer restocking, and air freight activity. Thus, revenue growth and EBIT margins are easing, and execution uncertainty is high. On the other hand, the profitability can stabilize in the quarters ahead as new management shifts from a growth to an efficiency posture. In general, FedEx’s extensive international shipping network is extraordinarily difficult to duplicate and despite near-term normalization off pandemic highs, domestic/international e-commerce spending should remain a longer-term tailwind (outside a major recession). Although Amazon has been insourcing more of its own U.S. last mile package deliveries over the past several years, FedEx has bolstered its ground and express capabilities and is well positioned to serve the myriad other retail shippers pursuing e-commerce, not to mention its entrenched relationships in B2B delivery. The TNT integration is wrapping up and the efforts to bear fruit in Europe.

Financial Strengths

Total debt approached $20.3 billion as of fiscal year-end 2022 (ended May), down slightly from $20.9 billion in fiscal 2021 and $22 billion in fiscal 2020. Since May 2017, FedEx has borrowed around $7 billion (net) to finance aircraft purchases, sorting facility expansion and automation, pension funding, dividends, and periodic share repurchases. This partly reflects $3 billion of unsecured debt issued in April 2020 to increase financial flexibility as the pandemic hit, and to pay off part of its commercial paper program. FedEx ended fiscal 2022 with roughly $7 billion in cash and equivalents; similar to fiscal 2021. Total debt/adjusted EBITDA came in near 2 times in both fiscal 2021 and fiscal 2022, which represents improvement from 3.3 times in fiscal 2020, as the pricing and demand backdrop surged over the past few years. The metric to hold relatively steady in fiscal 2023. Adjusted EBITDA excludes mark-to-market pension charges and nonrecurring costs.

Bulls Say

  • Outside a prolonged recession, and despite near-term normalization, FedEx’s U.S. ground package delivery operations should enjoy medium-term growth tailwinds rooted in favourable e-commerce trends.
  • FedEx’s massive package sortation footprint, immense air and delivery fleet, and global operations knit together a presence that’s extraordinarily difficult to replicate.
  • During its nearly five-decade history, FedEx has weathered multiple economic cycles. While short-term results may suffer, the firm’s powerful parcel delivery network is firmly established.

Company Description

FedEx pioneered overnight delivery in 1973 and remains the world’s largest express package provider. In its fiscal 2020 (ended May 2020), FedEx derived 51% of revenue from its express division, 33% from ground, and 10% from freight, its asset-based less-than-truckload shipping segment. The remainder comes from other services, including FedEx Office, which provides document production/shipping, and FedEx Logistics, which provides global forwarding. FedEx acquired Dutch parcel delivery firm TNT Express in 2016. TNT was previously the fourth-largest global parcel delivery provider.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Dividend Stocks

Roche’s Innovative Drug Portfolio and Complementary Diagnostics Division Support a Wide Moat

Business Strategy & Outlook

Roche’s drug portfolio and industry-leading diagnostics conspire to create maintainable competitive advantages. As the market leader in both biotech and diagnostics, this Swiss healthcare giant is in a unique position to guide global health care into a safer, more personalized, and more cost-effective endeavor. Strong information sharing continues between Genentech and Roche researchers, boosting research and development productivity and personalized medicine offerings that take advantage of Roche’s diagnostic arm. Roche’s biologics focus and innovative pipeline are key to the firm’s ability to maintain its wide moat and continue to achieve growth as current blockbusters face competition. Blockbuster cancer biologics Avastin, Rituxan, and Herceptin are seeing strong headwinds from biosimilars. 

However, Roche’s biologics focus (more than 80% of pharmaceutical sales) provides some buffer against the traditional intense declines from small molecule generic competition. In addition, with the launch of Perjeta in 2012 and Kadcyla in 2013, Roche has expanded its breast cancer franchise, and Phesgo, a subcutaneous coformulation of Herceptin and Perjeta, is launching in the U.S. Gazyva, approved in CLL and NHL and in testing in lupus, will also extend the longevity of the Rituxan franchise. Avastin’s lung cancer sales are vulnerable to biosimilars and competition from new therapies Opdivo and Keytruda, but Roche’s own immuno-oncology drug Tecentriq launched in 2016, and the peak sales potential is above $10 billion. Roche is also expanding outside of oncology with MS drug Ocrevus ($9 billion peak sales) and hemophilia drug Hemlibra ($6 billion peak sales). Roche’s diagnostics business is also strong. With a 20% share of the global in vitro diagnostics market, Roche holds the number-one rank in this industry over competitors Siemens, Abbott, and Ortho. Pricing pressure has been intense in the diabetes-care market, but new instruments and immunoassays have buoyed the core professional diagnostics segment.

Financial Strengths

Roche’s financial health remains robust. At the end of 2021, Roche’s net debt stood at CHF 18.2 billion, or 20% of total assets. Debt levels increased in late 2021 as Roche repurchased shares held by Novartis, but with debt maturities spread over the next several years, the firm will meet obligations easily. As per the estimate free cash flows north of CHF 15 billion annually over the next five years. Roche to maintain a dividend payout ratio around 50% going forward, implying mid-single-digit annual increases in dividends per share.

Bulls Say

  • Roche and its innovative U.S. arm Genentech have a solid history of generating blockbuster therapies in oncology, and Roche’s pipeline is full of novel candidates, with a particularly large late-stage pipeline. 
  • Hemophilia drug Hemlibra and MS drug Ocrevus have multi-billion-dollar sales and significant growth potential, further diversifying Roche’s revenue. 
  • Collaboration between its diagnostics and drug-development groups gives Roche a unique in-house angle on personalized medicine.

Company Description

Roche is a Swiss bio pharmaceutical and diagnostic company. The firm’s best-selling pharmaceutical products include a variety of oncology therapies from acquired partner Genentech, and its diagnostics group was bolstered by the acquisition of Ventana in 2008. Oncology products account for 50% of pharmaceutical sales, and centralized and point-of-care diagnostics for more than half of diagnostic-related sales.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Dividend Stocks

Novartis Holds a Wide Portfolio of Drugs That Support Steady Cash Flows

Business Strategy & Outlook

With strong positions in multiple key therapeutic areas, Novartis is well positioned for steady long-term growth. Strong intellectual property supporting multibillion-dollar products, combined with an abundance of late-pipeline products, creates a wide economic moat. While patent losses on anaemia drug Exjade and cancer drug Afinitor will weigh on near-term growth, a strong portfolio of drugs along with a robust pipeline should ensure steady long-term growth. Novartis’ drug segment is poised for long-term growth driven by new pipeline products and existing drugs. Novartis’ strategy to focus largely in areas of unmet medical need should strengthen the firm’s pricing power.

 Additionally, Novartis differentiates itself by its sheer number of blockbusters, including Entresto for heart failure and Cosentyx for immunology diseases. Also, it has generated a strong late-stage pipeline with recent launches of migraine drug Aimovig and cancer drug Kisqali. Despite the patent losses on Exjade and Afinitor (and potentially multiple sclerosis drug Gilenya), the combination of a strong pipeline of new products and a diverse, well-positioned operating platform should translate into steady growth. Beyond the branded drug segment, Novartis also sells generic drugs through its Sandoz division. While the basic generic drugs typically offer more limited profits, the focus of Novartis’ generic unit on hard-to-make drugs like biologics, which should offer higher growth pathways and stronger margins. Novartis is getting more focused with its recent spin off of its eye care division, Alcon. While the drug division markets eyecare drugs, one can view the overlap with Alcon’s surgical and vision-care products as relatively minor. As a result, one cannot expect many dyssynergia by spinning off the Alcon business. The spinoff is in line with Novartis’ strategy to focus on human prescription drugs, which has been playing out over the past several years with the divestitures of the vaccine, animal health, and consumer healthcare businesses.

Financial Strengths

Novartis carries a solid financial position with debt/2023 projected EBITDA of 1.5 times and free cash flow after capital expenditures/debt of close to 0.5. Further, its diverse platform of drugs should translate into steady cash flows to easily service debt requirements. Novartis primarily uses its cash to fund its dividend, which represents close to 60% of the company’s core earnings. The continued dividend increases but at a slow rate over the next few years. Additionally, the company will continue to pursue acquisitions, which are likely to be funded by cash from operations and occasionally increased debt.

Bulls Say

  • Novartis’ solid late-stage pipeline should propel long-term growth. The company should launch several new drugs during the next several years in critical therapeutic areas such as immunology and oncology. 
  • Novartis recently divested its Roche share, yielding over $20 billion, which provides the firm with increased options to re-deploy capital. 
  • Novartis’ research and development focuses on areas of unmet medical need, which should yield several innovative drugs with strong pricing power.

Company Description

Novartis AG develops and manufactures healthcare products through two segments: Innovative Medicines and Sandoz. It generates the vast majority of its revenue from Innovative Medicines segment consisting of global business franchises in oncology, ophthalmology, neuroscience, immunology, respiratory, cardio-metabolic, and established medicines. The company sells its products globally, with the United States representing close to one third of total revenue.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Dividend Stocks

Sanofi’s Discontinuation of Cancer Drug Amcenstrant Is Disappointing, but No Major FVE Impact

Business Strategy & Outlook

Sanofi’s discontinuation of cancer drug amcenstrant does not have a major impact on the firm’s fair value estimate as projected peak annual sales for the drug at well below EUR 1 billion annually. However, the string of bad news (including the recent clinical hold on multiple sclerosis drug tolebrutinib) in the late-stage development is concerning. Nevertheless, drug development is risky, and failures are common. These pipeline setbacks aren’t overly concerning, and one continues to believe Sanofi will be able to develop the next generation of drugs to offset eventual patent losses, which is a key factor supporting its wide moat. 

Also, the limited patent losses over the next several years also provide time for Sanofi to refill its late-stage pipeline with several early-stage drugs that look encouraging. On amcenstrant, poor clinical data led to the discontinuation of the drug. A fairly high threshold of efficacy and safety was needed to keep the clinical studies going since there are many very competitive drugs already approved and many more in development for breast cancer. The previous failure of the drug in later-lines of breast cancer treatment did not bode well for the drug. Despite the setbacks, Sanofi’s drug development success improved. One is most bullish on late stage drugs efanesocotocog for hemophilia (strong phase 3 data), multiple sclerosis drug tolebrutinib (despite the clinical hold), and several mid-stage drugs targeting cancer and rare diseases.

Financial Strengths

Sanofi remains on solid financial footing, closing 2021 with a debt/EBITDA ratio of 2 times. Further, the company generates stable cash flows that should enable the firm to meet its dividend payments and still accumulate significant cash reserves. The company redeployed its cash through bolt-on acquisitions in the neighborhood of $2 billion-$5 billion each year to augment its internal research and development. The recent sale of Regeneron stock of close to $12 billion may open up the possibility of a larger acquisition.

Bulls Say

  • Sanofi is launching immunology drug Dupixent, which holds strong pricing power and major blockbuster potential across several indications.
  • Sanofi’s strong entrenchment in rare-disease drugs should translate into steady pricing power as payers tend not to push back on pricing in this area.
  • With a wide product offering in vaccines, consumer health and insulins, Sanofi is well positioned for the fast-growing emerging markets.

Company Description

Sanofi develops and markets drugs with a concentration in oncology, immunology, cardiovascular disease, diabetes, and vaccines. However, the company’s decision in late 2019 to pull back from the cardiometabolic area will likely reduce the firm’s footprint in this large therapeutic area. The company offers a diverse array of drugs with its highest revenue generator, Dupixent, representing just over 10% of total sales, but profits are shared with Regeneron. About 30% of total revenue comes from the United States and 25% from Europe. Emerging markets represent the majority of the remainder of revenue.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Global stocks Shares

ALS’ global network of more than 350 laboratories provides a geographically diverse revenue base

Global network and financial technology concept.

Business Strategy & Outlook

ALS is a global provider of analytical testing and inspection services; it also has a small Australian-focused distribution business. While dominating the fragmented Australian market, and being a large global player in commodity and environmental testing, it is trumped by the majors, Bureau Veritas, SGS, and Intertek in non-destructive testing and inspection. Services include laboratory testing for the mineral, coal, environmental, food, and pharmaceutical segments. Excellent reputation, technical capabilities, a global network, and established relationships with global clients are key advantages over often fragmented competitors. While laboratory equipment is readily available, it is the service and ability to meet customer requirements in a cost-effective way that helps ALS retain clients and expand the existing business. Earnings volatility stems from significant exposure to cyclical commodity markets, particularly exploration. ALS’ global network of more than 350 laboratories provides a geographically diverse revenue base: 37% Asia-Pacific, 36% Americas, 24% EMENA, and the balance Africa. This global network reduces region reliance and gives it the capability to leverage experience across borders and serve an international client base.

During the mining boom, the minerals division was the growth engine. EBIT almost doubled within two years, and minerals still accounts for just under half of group EBIT. It provides services across the exploration, expansion, and production stages. These include sample preparation, quantity and quality analysis, grading and process plant control/optimisation, and reshipment inspection across a vast range of minerals and commodities such as gold, silver, platinum, iron ore, nickel, bauxite, and uranium. Earnings are heavily tied to exploration-type projects. ALS charges market-leading prices for superior service, reputation, and timeliness. ALS life sciences undertakes environmental, pharmaceutical, and food testing. The flow-on impacts of population growth, and developing world urbanisation driving public and private infrastructure expansion, are expected to increase demand in these areas.

Financial Strengths

ALS is in reasonable financial health. At the end of fiscal 2015, acquisitions and capital expenditure had pushed net debt to AUD 776 million and gearing to 37%. A subsequent AUD 325 million capital raising meant gearing fell to near 28% and net debt/EBITDA from 2.6 times to a manageable 2.0 times.

Incremental acquisitions in the life sciences segment have again been accompanied by increasing group net debt. Despite strong net operating cash flow in fiscal 2022, net debt increased nearly 50% on the previous corresponding period to AUD 902 million, reflecting AUD 410 million in capital and acquisition expenditure and AUD 131 million on dividends. Gearing rose to 44% from 36% and net debt/EBITDA to 1.8 from 1.6. While not low, this remains a comfortable level of gearing, particularly given the reliability of life sciences revenue and the fact that this segment has grown to 53% of group total revenue. Gearing remains within the limits of ALS’ sub-45% target ratio. Excluding acquisitions, projected sub-1.0 net debt/EBITDA by fiscal 2027, though ALS’ acquisitiveness makes a sub-1.0 target unlikely.

Management has continued to seek additional bolt-on acquisitions, particularly in the life sciences area, but given cyclical earnings and a weaker environment for mineral and coal testing, the focus remains on balance sheet conservatism. Many companies servicing the mining sector were crippled during the global financial crisis, when a dangerous combination of high debt levels and volatile earnings required large capital raisings to keep them afloat. ALS avoided this by increasing earnings diversity, keeping debt levels manageable, and turning to shareholders when it needed to fund acquisitions. The capital base has increased significantly since fiscal 2005, funding acquisitions of The Reservoir Group in the U.S., Enviro-Test Lab Group in Canada, Ecochem in the Czech Republic, and Pearl street, Ecowise, and Ammtec in Australia.

Bulls Say

  • ALS has diversified the earnings base to mitigate exposure to highly cyclical commodity markets. Expansion into food and pharma testing, as well as inspection and certification markets, should provide growth despite a significant slowdown in minerals testing.
  • Large clients are unlikely to move away on price alone, with quality and skills essential requirements.
  • Exposure to mineral and coal testing could once again provide earnings growth if the global economy’s appetite for commodities increases.

Company Description

Founded in the 1880s and listed on the ASX in 1952, ALS operates three divisions: commodities, life sciences, and industrial. ALS commodities traditionally generated the majority of underlying earnings, providing geochemistry, metallurgy, inspection and mine site services for the global mining industry. Expansion into environmental, pharmaceutical and food testing areas and commodity price weakness have lessened earnings exposure to commodities.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

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