AstraZeneca (AZN) is one of the world’s largest pharmaceutical companies. On an average day, nearly six million of its shares change hands. However, on Wednesday, buyers and sellers took the day off with a volume of less than 40,000.
There wasn’t any news on the day. So, why did AZN sit atop Barchart.com’s Wednesday leaderboard for the option with the most unusual options activity?
That’s right, the June 16 $72.50 call contract with a $2.49 ask price had a volume of 19,596, 118.05x the open interest, and double AstraZeneca’s 30-day average volume. So this call contract had almost as much volume as its total shares traded on the day.
I’ve got a couple of ideas why.
2022’s Results Are Starting to Sink In
The UK-based pharmaceutical giant reported Q4 2022 and full-year results one week ago today. It beat analyst earnings estimates in the fourth quarter by three cents at $1.38 a share. The company expects another good year in 2023, with plenty of new products coming down the chute.
“‘The innovation narrative remains strong,’ Mark Purcell, an analyst at Morgan Stanley, wrote in a note to clients, saying the company plans to start more than 30 key trials this year, with 10 that have the potential to deliver peak sales of more than $1 billion,” Bloomberg reported on Feb. 9.
On the top line, revenues in 2022 were 25% higher, excluding currency, over 2021, to $44.4 billion. Its oncology products, which account for one-third of its overall revenue, saw sales increase by 19, excluding currency.
Tagrisso, which treats non-small cell lung cancer, had revenue of $5.4 billion, up 15%, making it AstraZeneca’s best seller, accounting for 12% of its sales. The company finished the year with 14 drugs generating $1 billion or more in annual revenue.
On the bottom line, it had core earnings in 2022 of $10.3 billion ($6.66 a share), 33% higher than in 2021. In addition, its profitability was excellent in 2022, with an 80% gross margin, 600 basis points higher year-over-year, and a core operating margin of 30%, 400 basis points above last year’s margin.
That’s helpful when spending nearly $10 billion on research and development (22% of revenue) each year. But, of course, if you don’t invest in R&D, the earnings eventually dry up when you can’t find any worthwhile acquisitions to fill the gaps.
Innovation is everything in the pharmaceutical game.
Let’s Not Forget the Pipeline
If I had a dollar for every time the word “pipeline” was used in an article about drug company investments, I’d indeed be a very wealthy man. FYI, it’s mentioned 14 times in AstraZeneca’s 51-page Q4 2022 press release.
“2022 was a year of continued strong company performance and execution of our long-term growth strategy,” stated CEO Pascal Soriot. “We made excellent pipeline progress with a record 34 approvals in major markets, and we are initiating new
late-stage trials for high potential medicines such as camizestrant, datopotamab deruxtecan and volrustomig.”
In 2023, the company plans to initiate at least 30 late-stage clinical trials. These trials are part of its goal to create at least 15 new drugs for commercialization worldwide. Future success will depend on how many of these in the pipeline become billion-dollar revenue generators.
UK fund manager Steve Clayton of Hargreaves Lansdown is cautiously optimistic about the company’s pipeline. But, he warns, “[P]ipelines have been known to leak, so it is very much AstraZeneca’s case to prove.”
Soriot, who’s run the firm since 2012, believes that the company’s growth plans in 2023 and beyond are very much on track. In 2023, it expects revenues to grow 3-5% with earnings growth of 8-12%.
I’ll take that kind of consistent growth every day and twice on Sunday.
The Call Option in Question
AstraZeneca paid a first interim dividend of 93 cents and a second interim dividend of $1.97 for an annualized payment of $2.90. That’s a healthy 4.3%. Combining that with its stock’s five-year cumulative return of 100.2%, double the S&P 500, I don’t think there’s any doubt that AZN is an excellent long-term buy.
This brings me back to the June 16 $72.50 call.
It’s got to get to $75 within 120 days to break even on the option. The stock has rarely traded above $70 over the past five years, so it’s become a bit of a ceiling for AZN. The biggest consideration is whether you want to make a downpayment of $249 for the right to buy 100 shares of its stock at $72.50.
Unless AstraZeneca blows up its pipeline, I don’t know how its share price doesn’t trade for more than $135 five years from now.
Alternatively, AZN needs to increase by $5.81 over the next four months to double your money on the call premium. That’s less than 9%. It’s more than possible.
As I write this late on Thursday morning, AZN shares are down 2.7%. The June 16 $72.50 call has a volume of 55 and an ask of $1.78, 29% lower than yesterday. So today, it's an even better buy.
The risk/reward proposition is in your favor if you're a long-term investor.
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On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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