Zacks_Analysts' Blog : AstraZeneca to Expand in China - Analyst Blog

AstraZeneca (AZN) recently announced that it has entered into an agreement to acquire a Chinese privately-held company, BeiKang Pharmaceutical Company Ltd, a generics manufacturer. Post acquisition, AstraZeneca will gain a portfolio of injectable drugs for the treatment of infections. AstraZeneca plans to manufacture and market these products in China upon completion of the acquisition process.

The acquisition is subject to the approval of certain regulatory authorities, including the Ministry of Commerce in China. Though the financial terms of the agreement has not been disclosed, the deal is expected to be complete by first quarter 2012.

The Chinese pharmaceutical market is growing rapidly; from being worth $10 billion in 2004, its value increased to $41 billion in 2010. According to the estimates of IMS Health, the market is further anticipated to grow and would be valued at over $100 billion by 2015. However, the Chinese pharma market is underserved with over 800 million patients having limited access to quality treatment. AstraZeneca aims to tap this market and expand in this region.

AstraZeneca operates in multiple countries across the globe, has benefited from its focus on emerging markets. In 2010, weak US sales were largely mitigated by strong sales in emerging markets which climbed 16% to $5.2 billion driven by impressive performances in China (up 28%), Russia (up 26%) and Brazil (up 17%). Emerging markets represent significant commercial opportunities with factors like pricing pressure in the EU and intensifying generic competition affecting sales in large pharmaceutical markets. AstraZeneca has invested approximately $500 million in China, with $200 million being invested in a new manufacturing facility, located in China Medical City, Taizhou. The latest acquisition announcement further emphasizes AstraZeneca’s intention.

Our Recommendation

We currently have a Neutral recommendation on AstraZeneca. The stock carries a Zacks #3 Rank (hold rating) in the short run. Even though we are encouraged by the strong cardiovascular franchise at AstraZeneca and the company’s focus on the high-potential emerging markets, we remain concerned about the generic competition faced by its key products. The job cuts are a part of the company’s cost-cutting initiatives in the face of increasing generic competition.