(Bloomberg) -- AstraZeneca Plc started the week with a market valuation of about £171 billion ($222 billion). By the close on Thursday it had slumped to little more than £150 billion and the drugmaker had lost its spot as the UK’s biggest company by market value to Shell Plc.
A call hastily convened by the company with investors on Wednesday did little to quell concerns, and the challenge now facing Astra Chief Executive Officer Pascal Soriot is how to handle the fallout from Beijing’s deepening investigation into the company’s China unit.
Chinese authorities are probing alleged illegal importation of cancer drugs into China via Hong Kong and data privacy breaches, Astra said Wednesday. This is on top of another, separate investigation into the company’s China arm for medical insurance fraud, which has already resulted in 100 ex-Astra employees being sentenced.
The stock has plunged more than 25% since reaching a record high in early September and as Astra prepares to report earnings on Tuesday, it may find this week’s slump hard to shake off. Even Monday’s promising data on its experimental obesity pill — an asset in the pharmaceutical industry’s fastest growing area — did little to take the edge off investors’ China worries.
“This could drag for some time,” said Naresh Chouhan, founder of health-care equity research house Intron Health, in reference to the China investigation. Still, this week’s stock reaction “looks overdone,” he added.
Two current and two former senior executives in Astra’s China unit are under investigation. Some employees are alleged to have illegally brought the immunotherapy treatment Imjudo into the country, Bloomberg reported earlier. In addition, the company’s China president Leon Wang remains in detention.
Astra said these are all individual criminal cases and that the company has not been questioned.
Mixed results for an experimental lung cancer drug with partner Daiichi Sankyo Co. in September and analyst concerns about the treatment’s potential regulatory approval have also hurt the stock lately.
Some analysts have drawn comparisons between Astra and rival British drugmaker GSK Plc, whose shares plummeted in August 2022 following a flurry of litigation around recalled heartburn treatment Zantac. GSK shares are still down more than 10% since that time, even though the company has settled the majority of cases. Some analysts predict a similarly drawn-out process for Astra.
“It’s impossible for the company to put a timeframe on how long resolution may take,” Barclays Plc analyst Emily Field said in a note following a call with Astra Chief Financial Officer Aradhana Sarin on Wednesday. However, Field said the probe “is likely to have a limited impact on AstraZeneca financially on a go-forward basis.”
Any further commentary on the China investigations will be in focus when Astra reports on Tuesday, according to UBS Group AG analyst Matthew Weston. Goldman Sachs Group Inc. analyst Rajan Sharma is “positive on fundamentals,” but acknowledges that “China headlines could temper sentiment.”
The probes are a blemish on Soriot’s tenure as CEO. He has been at the helm of Astra since 2012, winning plaudits for boosting the stock price in the wake of Pfizer Inc.’s failed 2014 takeover attempt.
But for Martin Walker, head of UK equities at Invesco Asset Management Ltd., this week’s selloff was a “very aggressive market reaction.” He added that AstraZeneca shares offer attractive value.
“I don’t have visibility on what this issue in China may cost them,” he said by phone. “But I suspect that it will be significantly less than what has been taken off the market cap.”
Astra, which generated 13% of its revenue from China last year, isn’t the only multinational pharmaceutical company to have faced investigation there. In 2014, Chinese authorities fined GSK £297 million and imposed a suspended prison sentence on an executive for bribing doctors, following a 15-month probe that curbed the drugmaker’s sales.
“If the GSK saga is a good parallel, then AstraZeneca’s China business could be in for retraction over the next 1-2 years,” TD Cowen analyst Steve Scala wrote in a note dated Tuesday. “But the long-term opportunity in China should remain intact.”
Not everyone is comfortable comparing Astra with GSK.
“Importantly, AstraZeneca has reiterated that it is not aware that it is being directly investigated,” Shore Capital analyst Sean Conroy said in a note Thursday. “Until such point, we would caution people from drawing too many parallels between this and the bribery scandal that reared its head for GSK.”
--With assistance from Kit Rees.
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