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TThe stock market is cruel. AstraZeneca’s reward for revealing promising data for its “vaccine for the world”, developed in partnership with the University of Oxford, was a 3.8% drop in its share price. There is no gratitude there, just a decrease of approximately £ 4 billion in the value of the company.
Investors have to react in some way, but the strong response seems strange. AstraZeneca, remember, is committed to distributing the vaccine at cost during the course of the pandemic. For the purposes of that promise, it is a bit vague who decides when the pandemic ends. But it has always been reasonably clear that AstraZeneca will not make a profit on initial orders that have been received from governments and international organizations. So the day the company can move to a for-profit model (with supplies to poorer countries at cost) is still far off.
City analysts, however, like to stack projection upon projection. In fact, his eyes are focused on the eventual size of the long-term market for coronavirus vaccines. Estimates stretch up to $ 25bn (£ 19bn) if it turns out that an annual injection of coronavirus will become as common as an annual flu injection.
Vaccines in development
Seen through that narrow business lens, it is possible to simply squint at the numbers and conclude that the highest hopes were not met with the initial data. The leading figure of 70% efficacy did not match the 95% achieved by the Moderna and Pfizer-BioNTech vaccines. The wide gap between the two readings in the AstraZeneca / Oxford study needs to be explained (62% for patients receiving two full doses and 90% for those receiving a half dose and a full dose regimen).
However, discussing the first few statistics is surely overthinking. In vaccine trials, 70% efficacy is a good score and 90% in a dose study is excellent. The AstraZeneca-Oxford vaccine also has the significant advantage of being easier to distribute and cheaper to manufacture. It should make a major contribution to the global vaccination effort, both early and later.
However, what it means for AstraZeneca’s post-pandemic revenue seems like pure conjecture, but that was also true last week. It’s best to stick with the bigger picture – the vaccine news was very encouraging.
AA asks for a trailer
Under the heading “investment case,” you can still find this boast on AA’s corporate website: “We have a solid foundation on which to build a better AA and deliver sustainable returns.” The directors surely can’t believe that statement in any meaningful sense: They just spent four months talking to private equity bidders interested in taking the company at an applauded share price.
They may even have bagged a buyer, or rather two buyers acting in combination. TowerBrook Capital Partners and Warburg Pincus have announced an offering of £ 218 million, or 35 pence per share, compared to the 250 pence that AA traded on the stock exchange in 2014.
Back then, the idea was for the AA to be a reliable broker. The latest group of private equity owners, CVC and Permira, had attached an all-powerful caravan of debt to the rear, but according to the thesis, AA could handle the load thanks to its cash-generating powers. The company had a trustworthy brand, only RAC represented serious competition, and customer renewal rates were excellent.
For a while, shareholders enjoyed the ride: Shares hit 400 pence in 2015, and apparently no one stopped to wonder whether to trade with a severe leverage ratio of seven times, a measure between trading earnings and borrowing, it would eventually strain the financial engine.
The reality came with insurance taxes, insurance reforms, IT bills, and membership stagnation. Suddenly, the 2.6 billion pound loans, the current figure, but which hasn’t moved much over the years, became excessive. Point out a slow-motion drop in the stock price from 2017, showing that solid “fundamentals” (and, yes, the breakdown service itself still receives applause) can be overwhelmed by a fundamentally rotten balance sheet .
The search for a buyer became inevitable when the refinancing of a part of the debt in February of this year only showed that a similar exercise for the 913 million pounds due in 2022 would be painful. Potential bidders are talking of pumping in an additional 380 million pounds to help reduce debt.
The stupid levels of debt imposed by CVC and Permira can be blamed for this sorry saga, and it would be fair to do so. But, if the latest reversal to private equity occurs, hopefully AA Chairman John Leach, who has been in office since 2017 (and on the board since 2014), will bother to explain why the company did not attempt to fix its balance sheet when the stock price was high enough to allow for a capital increase. You must have understood the risks.
