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Should I Buy AstraZeneca Plc?

I’m shopping for shares again, should I pop AstraZeneca (LSE: AZN) (NYSE: AZN.US) into my basket?

The drugs don’t work

If you’re looking for a solid, defensive FTSE 100 stalwart, then look away now, because AstraZeneca isn’t it. The pharmaceutical giant has spent years trying to remedy expiring patents and a failing drugs pipeline, with mixed results. Broker forecasts are dismal, ranging from ‘underperform’, to ‘neutral’, to ‘hold’. Should I buck the trend and buy it?

Last time I looked at AstraZeneca, in October, I wrote that its share price had gone nowhere, slowly, for years. Patents were running out, its pipeline of replacement drugs was blocked, and management had resorted to sacking nearly 10% of its staff to shed weight. Since then, the share price has recovered a modest 9% to £33.07, although the FTSE 100 rose more than 13% over the same period. The longer-term share price story is uglier, with just 1% growth in three years against 22% for the FTSE 100 and an impressive 51% for arch rival GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US).

Profits plunge

AstraZeneca’s Q1 results piled on the misery, with a 13% fall in group revenue to £6.38bn, as it lost exclusivity for key drugs, and a 36% drop in pre-tax profits to $1.3bn. It wasn’t all bad news. Like many FTSE 100 companies, AstraZeneca is having more joy further afield, with sales rising 9% in emerging markets. It boasts 84 products in its drugs pipeline, and recently struck a deal with Amgen, the world’s largest biotechnology company, to develop five biotech drugs. AstraZeneca publishes its Q2 results on Thursday, when the market will be looking to see when its drugs pipeline will wash into the market.

I did like one thing about AstraZeneca: its yield. That was 6.1% in October and remains a peppy 5.6%, covered 2.3 times, easily beating GlaxoSmithKline’s 4.4% yield. There was something else to like, AstraZeneca’s lowly valuation of just 7.8 times earnings, which is almost half Glaxo’s current price-to-earnings ratio of 15 times earnings. So AstraZeneca is either an opportunity, or a great big flashing warning signal. Which is it?

Five better options

Forecast earnings per share (EPS) growth of -19% this calendar year -5% in 2014 suggests the latter. Chief executive Pascal Soriot faces a battle to get this company back into gear, as governments across the West look to contain spiralling drugs budgets. His attempts could stall if AstraZeneca gets sucked into the Chinese bribery scandal, in the wake of GlaxoSmithKlein. The company denies any wrongdoing, but the Chinese authorities are sniffing menacingly. We’ll learn more about AstraZeneca’s prospects on Thursday, but for now, the only compelling reason to buy it is the yield. Mind you, 5.6% is quite compelling.

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> Harvey owns shares in GlaxoSmithKline.