Neil Woodford, Richard Colwell and Martin Cholwill are among some of the managers to hold the biggest positions in AstraZeneca, according to data from FE Analytics, following the pharma giant’s 16 per cent share price fall on Thursday morning.
Results from the firm’s highly-anticipated lung treatment trial Mystic proved to be less-than-favourable, as its ability to elongate ‘progression-free survival’ among patients was called into question.
Not only this, the disappointing trial results came at the same time as the firm’s second quarter results, which found overall revenue and sales fell by 11 per cent during the first half of 2017. However, this was perhaps less of a shock given AstraZeneca’s ongoing following the loss of patent protection across some of its products.
In a separate announcement today, the firm will enter a partnership with US pharma giant Merck to co-develop and commercialise its cancer treatments.
The news of the former clearly overpowered the latter however, as the stock suffered its biggest one-day fall to-date, having opened this morning down 16 per cent at £43.47 per share.
Performance of equity over 1week
Source: Google Finance
This is significant for many investors who buy into funds. For those holding FTSE 100 trackers, the stock is the sixth-largest constituent of the blue-chip index with a 3.34 per cent individual weighting. That said, the FTSE has delivered a sideways performance over the past 24 hours.
However, FE Analytics data shows that more than 45 per cent of funds in the IA UK Equity Income sector hold AstraZeneca in their top-10 lists of holdings. A further 31 per cent of funds in the IA UK All Companies sector also hold the stock as one of their 10 largest positions.
Given that funds in the IA Global, IA Global Equity Income, IA Unclassified, IA Equity & Bond Income and the IA Mixed Investments sectors also hold the stock in their top 10 lists, this means more than 4.5 per cent of all funds in the entire Investment Association have significant exposure to the stock. 
This could be due to its dividend yield of 4.35 per cent, which perhaps looks attractive relative to the FTSE 100’s current yield of 3.84 per cent.
In fact, several investment professionals have warned investors to tread carefully within the IA UK Equity Income space, given the sector’s minimum yield requirement and the concentration of dividends within the FTSE.
Robin Geffen (pictured), who runs the Neptune Income fund and is founder of the firm, believes dividend risk within the UK income market is particularly elevated at the moment.
“It is well-known that UK dividends are highly concentrated, with around 38 per cent of all dividends coming from just five companies. What is perhaps less well-known is that dividend risk among UK equity income funds is at alarming levels in some cases,” he warned.
“Around a third of UK equity income funds rely on their top 10 to deliver more than 50 per cent of their yield. This is particularly topical at the moment given that dividend cover in the UK is at its lowest level since the height of the financial crisis.
“These are staggering numbers and we believe they show how, inadvertently, a number of UK equity income funds are relying on very few stocks to deliver a very large part of their yield.”
The below table shows the 20 IA funds with the largest individual weightings in AstraZeneca, as shown on FE Analytics. Neil Woodford has the largest overall weightings in both his SJP UK High Income and CF Woodford Equity Income funds at 9.62 and 8.86 percentage points respectively.
Omnis Income & Growth is in third place with a weighting of 8.46 per cent and, in fourth place, Woodford’s CF Woodford Income Focus fund has a 7.58 per cent exposure.
Source: FE Analytics
FE Alpha Manager Stephen Bailey, who co-manages the Liontrust Macro Equity Income fund, has cut his exposure to AstraZeneca by more than 80 per cent since the start of the year until recent weeks. While the stock originally accounted for 5 per cent of the overall portfolio, the manager now holds just 0.8 per cent in the stock.
The fund which – as its name suggests, has a top-down approach to investing – currently has a 5.6 percentage-point overweight to the healthcare sector relative to its FTSE All Share benchmark at 14.9 per cent. At the start of the year, the fund had a 20 per cent weighting in healthcare stocks.
“We’ve seen the share price of AstraZeneca strengthen over the last 12 months from £45 to recent highs of approximately £55. I think a lot of expectation was in that share price – it was widely believed the trial would have a very positive outcome,” Bailey said.
“We felt the danger was that investors were expecting success, the stock was being priced for a success, and we saw the potential for disappointment which would have a negative impact on the share price.
“As a way of preserving our assets, we have taken that holding down to 0.8 per cent of the portfolio so, effectively, we have sold more than 80 per cent of our shareholding between the start of the year and indeed recent weeks.”
That said, the manager is far from negative on the global healthcare sector or indeed pharmaceuticals. From here, however, he believes AstraZeneca’s share price may well tread water at between £40 to £45 for a while yet.
“We’re in no real rush to get re-invested into the stock,” Bailey added. “It’s still a fantastic company and it has some great products. This is a major setback, it’s a disappointment, and I think it’s a stark reminder that you can’t start to price in success before you actually get the results.”
Joe Walters, senior fund manager at Royal London Asset Management, currently holds AstraZeneca as his fourth largest position within the Royal London UK Income with Growth Trust.
He said: “Following the news today, it’s fair to say that AstraZeneca is currently at a crossroads. Clearly the failure of the first stage of the Mystic trial is disappointing, however market sentiment may well overreact to the news, as there’s are number of other drugs within the company’s pipeline which are showing positive progress and have the potential to deliver value for shareholders.
“In our view, the group should make every effort to capitalise on their strategic tie up with Merck announced today and strong progress in the trials for Tagrisso, another cancer drug currently in development.”
Ketan Patel, who co-manages the EdenTree UK Equity Growth fund, said he is hard-pushed to remember a time when a large-cap pharmaceutical company has suffered such a large setback in share price in one day.
“There are two more results due from the Mystic trials in 2018, but this early setback doesn’t augur well for a therapy that was forecast to have peak sales of $4bn in 2023,” he reasoned.
“Shareholders have suffered a roller coaster ride recently with the share price falling on the back of rumours of the CEO abandoning ship to join a generics business. This pipeline failure will only add further pressure on the CEO, Pascal Soriot, who promised much when he rebuffed a premium bid by Pfizer in 2014.
“The 5 per cent yield may provide a floor in the near term, but investors will need strong stomachs to continue to hold the name.”