Morning Note: Market news and an update from AstraZeneca.

Market News

The ongoing US government shutdown was extended into this week after the Senate failed to advance competing plans to extend federal funding. This has delayed key economic releases, including September’s non-farm payrolls report, leaving investors to rely on alternative indicators that signal a weakening labour market and reinforce expectations of an imminent rate cut. Markets are now pricing in about a 95% probability of a 25bps cut in October and an 84% chance of a similar move in December. The 10-year Treasury currently yields 4.15%.

The shutdown led to a mixed finish to last week for US equities – Dow Jones (+0.5%), S&P 500 (flat); Nasdaq (-0.3%) – with the rally in tech stocks taking a breather. The broader market gauge has now gone 114 trading sessions without a 5% pullback. The dollar traded in a choppy and directionless fashion to end the week down roughly 0.1%.

Gold has kicked off the week with a new all-time high and currently trades at $3,935 an ounce on the debasement trade as concerns heightened over growing debt in the US, Japan, and Europe. However, it is being outshone by silver which climbed above $48.70 per ounce, up almost 20% over the last month to its highest level since April 2011. Bitcoin hit a new all-time high, crossing $125,000 for the first time.

In Asia this morning, the Nikkei 225 surged by 4.75% and the yen weakened by 2% past 150 to the dollar after a ruling-party vote positioned pro-stimulus lawmaker Sanae Takaichi to become Japan’s next leader. Yields on 40-year debt climbed 13 basis points to 3.28% on concern a Takaichi government may sell more debt to finance tax cuts. The FTSE 100 is little changed at 9,481, while Sterling trades at $1.3540 and €1.1495.

Brent climbed above $65 after OPEC+ agreed to raise production by a modest amount, staving off fears of a super-sized hike. The actual increase may be less than half of the 137,000-barrels-a-day increment, RBC said. Copper moved back over $5 per pound, hitting fresh two-month highs as supply disruptions tightened the outlook. 

Source: Bloomberg

Company News

AstraZeneca’s share price has moved higher of late, driven by positive news on its R&D programme (including an announcement this morning on a breast cancer product), a US pricing agreement, and plans for a US listing.

AstraZeneca (AZ) is a global, science-led biopharmaceutical company. The main growth driver has been the group’s key Oncology franchises (including Tagrisso, Lynparza, Enhertu, Imfinzi, and Calquence), which have been supplemented by the other growth platforms of Respiratory & Immunology (R&I), Cardiovascular, Renal, & Metabolic diseases (CVRM), Vaccines & Immune Therapies (V&I), and rare diseases (through the $39bn acquisition of Alexion).

The group’s (tough) ambition is to deliver $80bn of revenue by 2030, up 8.3% p.a. from a 2023 base of $45.8bn. This will be driven by growth across its existing portfolio through geographic expansion and follow-on indications, as well as new products currently in late-stage development, offset by the loss of patent exclusivity in some existing products. The group expects to launch 20 new medicines before the end of the decade, with some products having the potential to generate more than $5bn in peak year revenue. Beyond 2030, the company will seek to drive sustainable growth by continuing to invest in transformative new technologies and platforms that will shape the future of medicine.

The aim is to generate a mid-30s core operating margin by 2026, versus 32% in 2023. Beyond 2026, the margin will be influenced by portfolio evolution and the company will target at least the mid-30s percentage range.

AZ currently invests more than 20% of sales in R&D and uses partnerships to gain access to innovative technology. The group has an attractive pipeline of potential new products, the success or failure of which will drive future profitability and the share price. Recent news flow on the pipeline in terms of new data and product approvals has been mainly positive, including:

-          Datroway: this morning, the company announced positive results from the TROPION-Breast02 Phase III trial, revealing that Datroway demonstrated a statistically significant and clinically meaningful improvement in overall survival and progression-free survival in patients with an advanced form of breast cancer versus chemotherapy in a trial when given early during treatment.

-          Enhertu: at the end of last month, the company announced positive results from a planned interim analysis of the DESTINY-Breast05 Phase III trial. Enhertu demonstrated a highly statistically significant and clinically meaningful improvement in invasive disease-free survival (IDFS) versus trastuzumab emtansine (T-DM1) in patients with HER2-positive early breast cancer with residual invasive disease after neoadjuvant treatment.

-          Other positive news flow recently came from Koselugo (positive recommendation for approval in the EU for symptomatic, inoperable plexiform neurofibromas); Tezspire (positive recommendation for approval in the EU for treating chronic rhinosinusitis); and Saphnelo (phase III TULIP-SC trial evaluating subcutaneous administration in patients with systemic lupus erythematosus (SLE) met its primary endpoint).

-          The news hasn’t all been positive – the RESOLUTE Phase III trial for Fasenra (benralizumab) in patients with chronic obstructive pulmonary disease (COPD) did not achieve statistical significance in the primary endpoint, which was the annualised rate of moderate or severe COPD exacerbations, despite showing numerical improvement.

Last week, the whole sector rallied after Pfizer and President Trump announced an agreement to lower prescription drug prices in the US Medicaid programme to what it charges in other developed countries in exchange for tariff relief. The deal reduces uncertainty for the sector which had increased in July when the President sent letters to 17 leading drug companies telling them to slash prices to match those paid overseas. AstraZeneca had already eased tensions with the US administration by announcing a huge ($50bn) investment in the US for medicines manufacturing and R&D.

At the end of last month, AstraZeneca announced plans to harmonise its share listing structure, a move that will require a direct listing of the shares on the New York Stock Exchange in place of existing US ADRs. Enabling a global listing structure will allow the company to reach a broader mix of global investors. The company will continue to be listed, headquartered, and tax resident in the UK.

We believe the outlook for the pharmaceutical sector remains mixed despite the backdrop of an ageing population. Although the business provides some protection against macroeconomic uncertainty and R&D productivity is expected to increase with the help of AI, concerns over drug pricing are likely to remain a headwind, especially at a time when governments are looking for ways to reduce debt levels. However, with a pipeline of innovative products targetting unmet patient needs, that can justify higher pricing, we believe AZ is well placed to generate above average revenue and earnings growth. This has been reflected in the strong long-term performance of the shares.

Source: Bloomberg