US And Europe Drug Reforms Will Erode Pricing Power

Key Takeaways

• Regulatory reforms and generic competition threaten pricing power, margins, and future revenue growth across key therapy areas.
  
• Cost pressures from rising R&D, compliance, and supply chain demands risk sustained margin compression and weaker shareholder returns.
  
• Strong late-stage pipeline, innovative medicine growth, and strategic investments position AstraZeneca for margin expansion and long-term revenue resilience across key global markets.

Catalysts

A biopharmaceutical company, focuses on the discovery, development, manufacture, and commercialization of prescription medicines.

• The combination of mounting drug price reform pressure in the US and Europe and increasing inclusion of high-value products in government pricing programs such as Medicare Part D and China's VBP scheme will steadily erode AstraZeneca's pricing power, directly limiting top-line revenue growth and compressing net margins as further reforms accelerate over the decade.
  
• AstraZeneca faces a secular shift in healthcare away from high-cost complex therapeutics towards earlier detection, digital health, and preventative models; this change is likely to dampen demand for certain chronic and oncology drugs, leading to lower-than-expected growth in key therapy areas and a long-term drag on both revenue and volume.
  
• Loss of exclusivity on blockbuster drugs like Tagrisso, Farxiga, and Imfinzi before 2030 means significant revenue declines are expected due to generic and biosimilar competition, a trend exacerbated by the company's heavy reliance on a small set of key growth drivers; this shift threatens both total revenues and future earnings growth.
  
• Persistent increases in R&D and SG&A expenditures risk pushing operational leverage in the wrong direction if late-stage pipeline bets fail to yield sufficient payback, likely resulting in sustained margin pressure and underperformance in net earnings well into the next decade.
  
• Severe industry-wide regulatory headwinds, including longer approval timelines, tougher environmental compliance expectations, and heightened supply chain scrutiny driven by geopolitical tensions, will force AstraZeneca to allocate more capital to non-revenue-productive activities-tightening free cash flow, worsening the company's cost structure, and limiting shareholder returns over the long term.

AstraZeneca Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on AstraZeneca compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming AstraZeneca's revenue will grow by 3.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 14.1% today to 19.2% in 3 years time.
• The bearish analysts expect earnings to reach $11.7 billion (and earnings per share of $7.48) by about July 2028, up from $7.8 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 23.6x on those 2028 earnings, down from 28.9x today. This future PE is lower than the current PE for the GB Pharmaceuticals industry at 29.8x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.64%, as per the Simply Wall St company report.

AstraZeneca Future Earnings Per Share Growth

Risks

• AstraZeneca has a robust late-stage pipeline in oncology, rare diseases, and biopharmaceuticals, with multiple high-value drugs reaching the market and at least 20 new medicines expected by 2030, providing strong potential for accelerating revenue growth and supporting margin expansion over the long term.
  
• The company is benefiting from strong demand for its innovative medicines across all key geographies, particularly in emerging markets where revenues outside China grew 17% and China itself showed 9% growth excluding the impact of Pulmicort, helping to diversify and broaden future revenue streams.
  
• Advancements in data analytics, genomics, and personalized medicine are being leveraged by AstraZeneca to develop targeted therapies and companion diagnostics, enhancing their R&D productivity and offering a pathway to maintain or grow market share, which may bolster long-term earnings.
  
• AstraZeneca's strategic investments in biologics manufacturing, next-generation modalities like cell and gene therapies, and ongoing digital transformation initiatives are likely to result in higher-margin products and improved operational efficiency, supporting sustained improvements in net margins and EBITDA.
  
• The industry-wide shift towards value-based healthcare and increased awareness and prevalence of chronic diseases globally align with AstraZeneca's core therapeutic areas, which could drive sustained patient demand for their therapies, mitigating some risks of revenue decline from pricing pressures or generic competition.

Valuation

• The assumed bearish price target for AstraZeneca is £109.16, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of AstraZeneca's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £175.43, and the most bearish reporting a price target of just £109.16.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $60.9 billion, earnings will come to $11.7 billion, and it would be trading on a PE ratio of 23.6x, assuming you use a discount rate of 6.6%.
  
• Given the current share price of £107.9, the bearish analyst price target of £109.16 is 1.1% higher. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.