Stephen Bailey

Why we cut our AstraZeneca holding

Stephen Bailey

Stephen Bailey, co-manager on the Liontrust Macro Equity Income fund comments on pharmaceuticals giant AstraZeneca following news that the “Mystic” study - its flagship research into lung cancer treatment - has failed.

This time last year we held over 5 per cent in AstraZeneca, but today that stands at 0.8 per cent – a reduction of around 85 per cent. We’re not negative on global healthcare as a theme – in fact we’re so positive on the sector’s unique macro-thematic backdrop and the associated tailwinds to earnings, dividends and valuations that it makes up about 15 per cent of the Liontrust Macro Equity Income fund. Rather, as we moved into 2017 we felt it prudent to reduce the potential for drug pipeline failure and capital risk. We were prompted by drug trial failures from US pharma giant Bristol-Myers Squibb, a company which shows striking similarities to AstraZeneca in terms of its industry leadership and – as it has transpired – misplaced prioritisation of immuno-oncology research. The failure of Bristol-Myers Squibb’s CheckMate drug trial led to a correction in excess of 20 per cent for the share price.

As we wrote back in February, the impact of Mystic on AstraZeneca’s share price was always going to be explicitly binary. Since January we’ve seen the company’s share price rise from around £45 to near £55 – much of this on the expectation of a positive result to Mystic. As the adage goes – “it’s better to travel than to arrive”. With the stock priced for success, we felt a disappointment would be a big shock, and saw the need to do something in advance of the outcome. Rumours abound on AstraZeneca’s M&A prospects – price wise it looks far more appealing as a target today than it did yesterday, but its prospects have diminished.

We much prefer GlaxoSmithKline, the largest holding in the fund, and its emphasis on long duration vaccine and consumer health assets, giving a reassuring visibility that is often lacked by more exciting peers.

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Friday, July 28, 2017, 3:12 PM