Horizon III clinicial trial failure puts further pressure on future AstraZeneca earnings

AstraZeneca (AZN) had yet another piece of bad news on Monday from its R&D pipeline with the news that cancer drug, Recentin (cediranib), failed to meet the primary endpoint in the Horizon III study. The company was evaluating the effectiveness of Recentin in a phase II/III study compared with Roche’s Avastin (bevacizumab), both in combination with chemotherapy in patients with first-line metastatic colorectal cancer (mCRC). As reported in a previous Contrarian Investor UK article, Horizon III was identifed as a high-risk study for Astra. The company also reiterated its financial guidance for 2010 and announced further cost cutting measures including site closures. The company guided for 2010 earnings of £3.80 ($5.75) to £4.10 ($6.15) , lower than the £4.20 ($6.32) reported in 2009 and putting the company on a forward price/earnings (p/e) of just over 7. With the loss of patent proection on cancer drug, Arimidex, and asthma drug, Pulmicort, in the US, the company expects a mid single-digit decline in revenue in 2010.

The pressure for Astra Zeneca to deliver on its R&D pipeline is signficant given the large number of patent expiries over the next 3-4 years. The failure of Horizon III puts the risks ahead for Astra into perspective and although the company trades on an undemanding forward p/e of 7 (compared to sector peers of 10 or so), the picture into 2011 and beyond is hazy. Although the company is focused on earnings growth through cost cutting, the scale of the patent expiries ahead means this will not be enough to sustain earnings per share. Astra has been plagued by bad luck in clinical trials, they need this luck to change quickly before Contrarian Investor UK advises this stock above other more diversified pharma stocks.

10th anniversary of internet bubble - "dot.com boom and bust"

Yet another anniversary today and its the tenth anniversary of the bursting of the internet technology bubble in March 2000 -  the "dot.com boom and bust". Today the technology heavy U.S. index, the NASDAQ,  stands at 2,341, down 53.6% or 2708 points from its peak of 5,100 achieved in March 2000 . Between January 1998 and March 10th 2000, the Nasdaq increased by over 200%.

For many private investors, the Internet bubble of 2000 was the first time they began trading stocks and for many it was a painful experience as they bought into companies with stratospheric valuations based on promises of future earnings, and watched prices plummet from March 2000 onwards. The rush into tech and internet stocks turned into a stampede as IPO's (Initial Public Offering) of new companies doubled and tripled overnight. The internet was seen as the only place to be. Share prices of traditional companies such as utilities, bricks and mortar retailers and even Buffett's Berkshire Hathaway collapsed as investors sold their"safe and boring" stocks to get into the internet revolution. Internet bulletin boards were awash with posters, "pumping and dumping" stocks with gullible amateur investors.

The classic example of Internet boom and bust was Boo.com, a U.K. listed company founded by Swedes Ernst Malmsten, Kajsa Leander and Patrik Hedelin in 1999, selling fashion items over the internet. The company spent $135 million of venture capital in just 18 months, and it was placed into receivership on 18 May 2000 and liquidated. The story of Boo.com's failure is captured in the fascinating book, "Boo Hoo: A Dot Com Story" by Ernst Malmsten, Erik Portanger, Charles Drazin. Despite only a few hundred thousand pounds in revenues the company had a staff of over 400, spent lavishly on champagne parties and first class travel round the world. Boo.com represented the new age of internet company, ones with lavish spending and no thought to cost control as the revenues would one day come. In the case of Boo these revenues just didn't come in fast enough as funding for these ventures dried up as the Dot.com bubble burst.

Another example of the tech bubble at its worst and an expensive lesson for many investors was a company founded in the U.K. in 1988 as Bookham Technology. It became the first company in the world to make optical components that can be integrated into a silicon chip. It floated in July 2000 at £10 and in August 2000 its shares hit an eye-watering £53! it was promoted to the FTSE 100 of the U.K.'s leading companies in 2000. By the end of 2000, its shares had fallen 99% to less than 50p a share and in 2004 it moved its listing to the U.S. on Nasdaq. A classic case of investors not understanding a business model and hype overtaking any sort of reality in terms of revenue projections.

In January 2000, AOL Time Warner was created when AOL purchased Time Warner for $164 billion. The shareholders of AOL owned 55% of the new company while Time Warner shareholders owned only 45%. In 2002, the company was forced to report a loss of $99 billion due to the goodwill write-off related to AOL, at the time, the largest loss ever reported by a company. In 2003, the company dropped the "AOL" from its name, and removed Steve Case as executive chairman. In May 2009 Time Warner announced that it would spin off AOL as a separate independent company, with the change occurring on December 9, 2009.

Finally, it would not be right to write an article on dot.com hype without including lastminute.com. Online travel agent, lastminute.com was founded by Martha Lane Fox and Brent Hoberman in 1998 that became an icon of the UK internet boom and bust. It, floated at the end of the dot com bubble in March 2000 and its share price peaked at over £5, valuing the company at close to £2.5 billion . By the end of 2000 its shares were trading at around 80p. It was purchased by U.S. company, Travelocity in July 2005 for £577 million.

The dangers of "momentum investing" where investors buy into stocks purely on historical changes in a stock price is exemplified by the dot.com crash. Some investors profited from the herd mentality of the crowd but many "lost their shirts". Buying a company's share purely on share price movement is very high risk and although momentum should influence an investment decision, the classic value parameters should always be assessed i.e. comparative future price/earnings, balance sheet, news flow  as discussed in a previous Contrarian Investor UK education segment (http://contrarianinvestoruk.blogspot.com/2010/01/contrarian-investors-guide-to-stock.html).