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21 Worrying Reasons Which Make AstraZeneca plc A Sell

Today I am outlining why I believe AstraZeneca (LSE: AZN) (NYSE: AZN.US) is set to experience consistent earnings pressure well into the foreseeable future.

Revenues outlook set to remain poorly

AstraZeneca has seen the effect of patent expirations across a multitude of its key drugs steadily wear down earnings performance in recent years. Although the company is ramping up activity to address this problem, the pharma play is expected to experience ongoing revenues pressure well into the future, and City analysts have pencilled in a 21% earnings per share decline for this year alone.

AstraZeneca has been busy on the acquisition path in recent months as it looks to compensate for a lack of sizeable progress in its organic pipeline. Just this week the firm announced that its Medimmune division, responsible for global biologics research and development, had purchased oncology specialists Spirogen. This follows the purchase of Amplimmune — a developer of therapeutics in cancer immunology — for a fee which could eventually rise to $275m.

Spirogen, which develops high-potency antibody-drug conjugates to fight tumours and cancer, was purchased for an initial $200m, a figure that could rise to $440m depending on certain development milestones being met. AstraZeneca also paid $20m for an equity stake in ADC Therapeutics which currently has a licensing agreement with Spirogen. AstraZeneca has identified oncology as a substantial revenues driver looking ahead.

Still, the full synergies associated with these purchases will of course take time to bed in, while the R&D conveyor belt from these units will require years to develop potential earnings-busters. The same can be said for the pharma giant’s plans to establish a web of research outposts across Europe, which are not expected to significantly boost the firm’s Phase III pipeline until 2016 at the earliest.

And the route from laboratory to pharmacy is a turbulent one, where poor trial results can lead to severe product delays or even the complete abandonment of development in some cases. During the summer AstraZeneca was forced to ditch testing of fostamatinib — an oral spleen tyrosine kinase inhibitor used as an oral treatment for rheumatoid arthritis — after late-stage testing failed to deliver promising results seen during early development. The failure led to a $140m pre-tax impairment charge.

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This likelihood of fresh earnings pressure is underlined by projections from the City's leading number crunchers, which expect the 21% earnings per share drop for 2013 to be followed by a further 6% slip next year. Personally speaking, I am not prepared to park my cash with the pharmaceutical firm until I see plump rewards being delivered from its turnaround strategy.

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> Royston does not own shares in AstraZeneca.