AstraZeneca/China: break-up deal would reflect necessity not choice

China is known for its prowess in gymnastics. Today it is the companies depending on that market which must perform some delicate balancing acts.

As tensions heighten between the US and China, AstraZeneca may offer its own twist by carving out its Chinese business. The London-listed drugmaker could then opt for a separate Hong Kong or mainland listing for the shares, the FT reported on Monday. This highlights a growing trend by businesses to insulate themselves from the region’s geopolitics.

Chief executive Pascal Soriot has pushed AstraZeneca harder and faster into China than any other big foreign drugmaker. Demand from the country’s large and ageing population for drugs such as lung cancer treatment Tagrisso attract AstraZeneca there.

It also sees the opportunities for acquisitions in China’s innovative biotech sector. China is an important market for leading edge cancer drugs. However, to do well there requires a cozy relationship with Beijing and the risk of intellectual property loss. 

Fast growing China sales have plateaued since the pandemic began. But these did rebound in the first quarter of this year to $1.6bn, up 11 per cent, as the country reopened from its strict lockdowns. AstraZeneca’s sales growth in developing countries should slow for the rest of the year to 8 per cent over the next two-years, according to Visible Alpha consensus estimates.

What could this China business be worth? It is not common for pharma groups to spin off an entire regional subsidiary. However, assume that it does and that the China unit can continue to increase revenues at high single digits. Compared with local peers AstraZeneca China could achieve a valuation worth up to 18 times its forward ebitda. That would suggest a valuation for the China business of up to $22bn, assuming ebitda margins of 20 per cent.

A carve out and potential distribution could provide shareholders with a tidy means to decide how much of any China risk-reward balance they are willing to hold. Should its economy properly begin its long-awaited pandemic recovery, that reward could well grow.