Why AstraZeneca plc’s Patent Cliff Presents A Golden Opportunity

Although AstraZeneca plc (LON: AZN) is in the process of losing many of its high-profile patents, I believe this presents the savvy investor with a golden opportunity

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

The term ‘value trap’ is often banded about by financial journalists and investors alike. It means a company whose shares appear to offer good value but, for any number of reasons, is fatally flawed and, as such, is not a wise investment.

Indeed, AstraZeneca (LSE: AZN) (NYSE.AZN.US) is often considered a value trap, having an exceptionally low price-to-earnings (P/E) ratio and a relatively high yield. With shares currently priced at 3147p at the time of writing, AstraZeneca yields 5.6% and has a P/E of just 7.8. This compares well to the healthcare sector which has a P/E of 15.8 and to the FTSE 100 whose P/E is 12.5.

5 Stocks For Trying To Build Wealth After 50

One notable billionaire made 99% of his current wealth after his 50th birthday. And here at The Motley Fool, we believe it is NEVER too late to start trying to build your fortune in the stock market. Our expert Motley Fool analyst team have shortlisted 5 companies that they believe could be a great fit for investors aged 50+ trying to build long-term, diversified portfolios.

Click here to claim your free copy now!

Doomsayers, however, claim that AstraZeneca is a value trap because it is currently experiencing a patent cliff, where many of its biggest selling and highest profile drugs are coming off patent. This means that generic drugs can be manufactured and prices undercut, equating to huge falls in both revenue and profitability for AstraZeneca.

However, I believe that the present situation presents a golden opportunity for investors.

Since the company replaced its CEO in October 2012 it has stepped-up its acquisition spree, recently purchasing a 100% stake in California-based Pearl Therapeutics. It has also ceased its share buyback programme, announced a partnership deal with Roche and plans to increase research and development spending in future years. It certainly has the financial muscle to do so, with debt levels being manageable (the debt/equity ratio is around 43%) and cash flow being impressive too.

Furthermore, dividends per share remain well covered and it is unlikely that they will have to be cut should forecasts prove to be correct and earnings fall over the next few years. However, with a new CEO, the financial clout to pursue an aggressive acquisition strategy, sector-leading R&D facilities as well as partnerships offering significant potential, AstraZeneca’s patent cliff may be somewhat offset by gains made elsewhere.

In that case, a P/E ratio of 7.8 suddenly looks good value, rather than a value-trap, and presents investors with a golden opportunity to buy a high-yielding healthcare company on the cheap.

I own shares in AstraZeneca and would recommend that if you are looking for more opportunities in the FTSE 100, this exclusive wealth report reviews five particularly attractive possibilities.

All five blue chips offer a mix of robust prospects, illustrious histories and dependable dividends, and have just been declared by The Motley Fool as “5 Shares You Can Retire On“.

Simply click here for the report — it’s completely free!

> Peter owns shares in AstraZeneca.

Is this little-known company the next ‘Monster’ IPO?

Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.

Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.

The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.

But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.

Click here to see how you can get a copy of this report for yourself today

More on Investing Articles

Tired woman sleeping on London underground
Investing Articles

5 steps to monthly passive income streams of £500

Aiming for regular passive income streams, our writer walks through five key steps he would take.

Read more »

Business people shaking hands
Investing Articles

Director dealings: HSBC, National Grid, Taylor Wimpey

Director dealings can indicate whether a company's doing well. So, here are this week's director dealings from three of the…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

2 lesser-known stocks with 10% dividend yields!

With sky-high inflation, sizeable dividend yields can help my portfolio grow. These two stocks are paying 10% on average.

Read more »

Businessman pulling out wooden brick from toppling stack
Investing Articles

Is the Woodbois share price a bargain – or a value trap?

The Woodbois share price has seen big swings recently. Our writer considers why and explains his response.

Read more »

Electric cars charging in station
Investing Articles

Here’s why NIO stock is my top EV pick!

NIO stock had been one of the worst-performing shares over the last year, but it appears to have bottomed out.…

Read more »

Risk reward ratio / risk management concept
Investing Articles

The JD Wetherspoon share price has fallen 45% — should I load up?

The JD Wetherspoon share price has shed almost half its value in the past year. Should our writer buy another…

Read more »

Light trails from traffic moving down The Mound in central Edinburgh, Scotland during December
Investing Articles

Down 50%, is the Scottish Mortgage share price a bargain in plain sight?

The Scottish Mortgage share price has lost half its value in recent months. Is it now a bargain for our…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

A cheap UK share for the cybersecurity boom!

I'm backing this UK share after its share price collapsed this week. In fact, I've recently added this cybersecurity stock…

Read more »