The stock market is cruel. AstraZeneca’s reward for unveiling promising data for its “vaccine for the world”, developed in partnership with Oxford University, was a 3.8% fall in its share price. No gratitude there – just a decline of roughly £4bn in the company’s value.
Investors have to react somehow, but the strong response looks odd. AstraZeneca, remember, has pledged to distribute the vaccine at cost during the course of pandemic. For the purposes of that pledge, it’s a little vague who decides when the pandemic is over. But it has always been reasonably clear that AstraZeneca won’t make profits from the initial orders that have been received from governments and international bodies. So the day when the company can move to a for-profit model (with supplies to poorer nations remaining at cost) is still some way off.
City analysts, though, like to pile projection upon projection. Their eyes are indeed trained on the eventual size of the long-term market for coronavirus vaccines. Estimates extend up to $25bn (£19bn) if it turns out that an annual coronavirus jab will become as common as an annual flu jab.
Viewed through that narrow commercial lens, it is possible – just – to squint at the numbers and conclude that the highest hopes weren’t achieved by the initial data. The headline number of 70% efficacy didn’t match the 95% achieved by the Moderna and Pfizer-BioNTech vaccines. The wide gap between the two readouts in the AstraZeneca/Oxford study – 62% for patients receiving two full doses and 90% for those on a half-dose, full dose regimen – needs to be explained.
Yet quibbling over early statistics is surely overthinking things. In vaccine trials, 70% efficacy is a good score, and 90% in one dosage 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 huge contribution to the global vaccination effort, both in the initial stage and thereafter.
What it means for AstraZeneca’s post-pandemic revenues, however, seems pure guesswork – but that was also true last week. Best to stick to the wider picture: the vaccine news was highly encouraging.
AA calls for a tow
Under the title “investment case”, you can still find this boast on the AA’s corporate website: “We have strong fundamentals upon which to build a better AA and deliver sustainable returns.” The directors surely cannot believe that statement in any meaningful sense: they’ve just spent four months talking to private equity bidders interested in towing the company away at a clapped-out share price.
They may even have bagged a buyer, or rather two buyers acting in combination. TowerBrook Capital Partners and Warburg Pincus have signalled an offer of £218m, or 35p a share, which compares with the 250p at which the AA was listed on the stock market in 2014.
Back then, the idea was that the AA was a reliable runner. The last crew of private equity owners – CVC and Permira – had attached an almighty caravan of debt at the back, but, ran the thesis, the AA could handle the load thanks to its powers of cash generation. The company had a trusted brand, only RAC represented serious competition and the customer-renewal rates were superb.
For a while, shareholders enjoyed the ride: the shares reached 400p in 2015 and nobody, it seemed, stopped to ask whether operating at a severe seven times leverage ratio – a measure of trading profits to borrowings – would eventually strain the financial engine.
Reality arrived with insurance taxes, insurance reforms, IT bills and stalling membership numbers. Suddenly, borrowings of £2.6bn – today’s figure but one that hasn’t moved much over the years – became far too much. Cue a slow-motion crash in the share price from 2017, proving that strong “fundamentals” (and, yes, the breakdown service itself still gets applause) can be overwhelmed by a fundamentally rotten balance sheet.
A hunt for a buyer became inevitable when the refinancing of a portion of debt in February this year only proved that a similar exercise for the £913m due in 2022 would be painful. The would-be bidders are talking about injecting a further £380m to help cut debt.
One can blame this sorry saga on the silly levels of debt imposed under CVC and Permira – and it would be fair to do so. But, if the latest reversal into private equity ownership proceeds, let us hope the AA chairman, John Leach, who has been in post since 2017 (and on the board since 2014), bothers to explain why the company didn’t try to fix its balance sheet when the share price was high enough to allow an equity raise. He must have understood the risks.