Allen Bond, CFA
Managing Director, Head of Research and Portfolio Manager
Initially, the news out of Oxford University sounded promising: A COVID-19 vaccine, developed in collaboration with British–Swedish drugmaker AstraZeneca (AZN), showed good results in clinical trials. With much of the world still in lockdown, billions of people were waiting for a vaccine so that they could resume pre-pandemic life.
For AstraZeneca, this vaccine release would be the latest in a line of drugs that included widely used cancer and diabetes drugs with long patent protections. But then it was revealed in November of 2020 that the efficacy of AstraZeneca’s vaccine was not as strong as had been believed.
When the vaccine was later made available in Europe, there were safety concerns around blood clots and internal bleeding, so European regulators temporarily halted the sale of the drug. The vaccine was never approved in the United States.
The news created negative sentiment for the company, and the stock price suffered as a result, but Jensen’s team of analysts took a different view. They believed the market had overreacted. “We saw it as an opportunity,” says Allen Bond, a portfolio manager with the Jensen Global Quality Growth Strategy.
No company gets through the years without stumbling from time to time. In the moment, it can be hard to understand which missteps are temporary and which ones will have a lasting impact. Human behavior being what it is, many investors can overreact, creating opportunity for cooler heads.
Jensen takes a different and more long-term approach. Companies in Jensen’s investment universe need to meet strict quality thresholds; to be considered, they must post returns on equity (ROE) of at least 15% a year for each of the past 10 years, as determined by Jensen. This means that managers are able to see whether these companies know how to run profitable business longer-term and if they can ride out the inevitable market setbacks.
For its part, AstraZeneca’s ROE has averaged greater than 30% over the past 10 years. The COVID-19 vaccine, while important to global health, was not a large part of its portfolio, so it didn’t factor heavily in Bond’s revenue projections. In the first quarter of 2022, sales of the COVID-19 vaccine and AstraZeneca’s monoclonal antibody treatment Evusheld accounted for just $1.6 billion out of a total $11.4 billion of sales, and revenues from those products were always expected to decline as the pandemic recedes.
Initially, the COVID-19 vaccine development gave AstraZeneca stock a boost. “We didn’t buy it because we thought it was too expensive,” Bond says. But when shares tumbled from over £93 a share in mid-2020 to around £79.35 in early 2021, the Jensen team took action.
Global pharmaceutical giants like AstraZeneca share significant competitive advantages thanks to their deep pockets, Bond notes.
“Pharmaceutical innovation often happens at the small companies, but then the large global players will acquire them and help accelerate the research phase through to the development and the regulatory phase,” Bond says. “Large companies know how to navigate regulators all over the world.”
Once the smaller players’ drugs are brought to market, the parent companies share in the profits. That’s what AstraZeneca has done, creating for itself an impressive portfolio of blockbusters including the lung cancer drug Tagrisso, a first-line treatment; diabetes drug Farxiga, which also treats chronic kidney disease; and Symbicort, an asthma inhaler.
What’s more, Bond says, “Tagrisso has 10 years of exclusivity. That gives us good visibility into AstraZeneca’s profitability.”
A history of innovation
While the launch of the COVID-19 vaccine was certainly disappointing for AstraZeneca, Bond and other members of the Jensen team were impressed by the company’s long track record of bringing other game-changing therapies to market, including cholesterol-lowering drug Crestor and acid reflux treatments Nexium and Prilosec. This strategy positions AstraZeneca well, Bond believes, because blockbuster drugs generate substantial revenue. Tagrisso alone generates over $1 billion in yearly sales.
“AstraZeneca has a lot of surplus cash that it can use to reinvest in the future, creating an even more attractive pipeline,” Bond says.
Case in point is AstraZeneca’s mammoth $39 billion acquisition of Alexion Pharmaceuticals in 2020. Alexion makes immunological drugs for rare diseases, which further diversifies AstraZeneca’s portfolio. That investment is already paying off. The Food and Drug Administration recently granted approval for the third time to Alexion’s Ultomiris, this time to treat generalized myasthenia gravis, an autoimmune neuromuscular disorder, in addition to two other conditions.
“They have close to 10 drugs in their portfolio that are material [to revenues],” says Bond. “So even if they get one of those wrong, the impact will be muted. That’s different from other pharmaceutical companies that are really making a bet that nothing goes wrong.”
Taking a long-term approach, Bond and his colleagues know that in the life cycle of any quality company something can go wrong, albeit temporarily. And when it does, they’ll be there to capitalize on the moment. Clearly, it pays to be patient.
Click here to view a list of the Jensen Global Quality Growth Strategy’s current holdings.
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