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Angels vs Devils: Should You Invest In AstraZeneca plc?

Making stock market selections are never black-and-white decisions, and investors often have to plough through a mountain of conflicting arguments before coming to a sound conclusion.

Today I am looking at AstraZeneca (LSE: AZN) (NYSE: AZN.US), and listening to what the angel and the devil on my shoulders have to say about the company.

Facility rebuild continues

AstraZeneca has made ambitious steps to beef up its research and development operations as part of recently-installed chief executive Pascal Soriot’s drive to deliver future earnings. This will see the company establish a web of laboratories across Europe, which the firm hopes will enable it to double the amount of Phase III testing asset volumes by 2016.

And the company announced this week that it was ploughing £120m into a new manufacturing facility in Macclesfield, UK — due to open in 2016 — in order to match surging demand from Japan, as well as emerging markets such as China and Russia, for its top-selling Zoladex cancer treatment.

Patents keep crumbling

Until the company’s R&D transformation plan — which is also being supplemented by a steady stream of acquisitions across the globe — begins to yield fruit, however, AstraZeneca is likely to continue being pounded by the effect of lapsing patents across many of its key products.

The company noted that this loss of exclusivity was mainly responsible for a 4% slip in revenues during July-September, at constant exchange rates, to $6.25bn. Indeed, the issue of patent loss across several brands accounted for around $350m of the drop.

A relatively cheap selection

Still, many argue that AstraZeneca’s muddy near-term outlook is already priced into the stock. The pharma giant currently trades on a P/E readout of 10.7 for 2013, based on current earnings projections, just above the value benchmark of 10 times projected earnings.

By comparison, fellow pharmaceutical play GlaxoSmithKline currently changes hands on an earnings multiple of 14.5 for this year, while the entire FTSE 100 presently deals on a forward average of 16.7.

Earnings erosion expected

But unlike GlaxoSmithKline, which is expected to punch accelerating earnings growth this year and next, AstraZeneca’s belated move to address the effect of key patent losses is not expected to deliver growth any time soon.

Forecasters anticipate earnings per share to decline 23% this year before slipping a further 8% in 2014. With the firm’s R&D revolution not expected to yield material results for some years yet, I believe that further heavy earnings weakness can be expected beyond the medium term.

A devilish stock pick

So although AstraZeneca’s bold steps to rejuvenate its lagging R&D division are a step in the right direction, I believe that the business still has a long way to go to compensate for the exclusivity loss across many of its critical drugs brands. Until this work begins to shows signs of sparking the firm’s earnings outlook back into life, I believe the company remains a risky selection for investors.

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> Royston does not own shares in any of the companies mentioned in this article. The Motley Fool has recommended shares in GlaxoSmithKline.