When I think of pharmaceutical company AstraZeneca (LSE: AZN) (NYSE: AZN.US), two factors jump out at me as the firm’s greatest strengths and top the list of what makes the company attractive as an investment proposition.
1) Promising product development pipeline
AstraZeneca’s turnover and profits have dwindled in recent years thanks to increased competition after some the firm’s bestselling drugs emerged from periods of patent protection. However, the firm is building up an exciting pipeline of new products, each a potential blockbuster, and forward-looking investors are driving the share price higher in anticipation of better times ahead.
The path from test tube to medicine cabinet is long, torturous, time-consuming and expensive. Something like one or two compounds in 10,000 tested end up as licensed treatments. Scientists carry out testing along the way in phases in order to comply with regulation, but phase three is the step before licensing, so when a formulation is approaching phase three testing, investors tend to get excited. However, there’s many a slip between cup and lip, leading to some potential treatments getting the chop even at that stage after, perhaps, many years of development activity.
Right now, AstraZeneca reckons it has 11 new molecular entities in Phase III or registration; almost double compared with last year. There are also 19 candidates for potential new Phase III starts in 2014-15. Such late-stage development activity is a key factor in achieving a return to revenue and earnings’ growth.
2) Firm cash flow
Although revenue and profits are struggling, cash flow is holding up quite well:
| Year to December | 2009 | 2010 | 2011 | 2012 | 2013 |
|---|---|---|---|---|---|
| Revenue ($m) | 32,804 | 33,269 | 33,591 | 27,973 | 25,711 |
| Net cash from operations ($m) | 11,739 | 10,680 | 7,821 | 6,948 | 7,400 |
| Adjusted earnings per share (cents) | 632 | 671 | 728 | 641 | 505 |
A strong cash flow performance seems to provide support for the share price. As long as AstraZeneca generates cash, it can keep recycling funds into R&D and pay dividends to investors. Cash flow is an important figure to watch while we wait for new products to boost revenue and profits.
What now?
Right now AstraZeneca seems to attract mainly as a turnaround proposition. It’s conceivable that a return to growth could occur as new products take off.
