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.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

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.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

More on Investing Articles

Young Black woman looking concerned while in front of her laptop
Investing Articles

ITV shares down after revenue guidance cut in first-half interim results

After releasing results this morning, the ITV share price slumped. But with several metrics looking positive, how will this effect…

Read more »

Investing Articles

This FTSE 100 stock’s down 50%, and a director just bought 8,000 shares

Directors of this blue-chip company have been snapping up a load of its shares. Should I do likewise and buy…

Read more »

Investing Articles

The BT share price is far too cheap, analysts say!

The BT share price fell on Thursday 25 July after the company's Q1 results. Dr James Fox takes a closer…

Read more »

Investing Articles

Is this the start of a stock market crash?

Global stock markets are experiencing some turbulence at the moment. Could investors be looking at a major decline in share…

Read more »

Investing Articles

As the Anglo American share price holds up on H1 results, should I buy?

Failed takeover attempts and major restructuring all affect the Anglo American share price. Here's what's happening at H1 time.

Read more »

Investing Articles

Here’s why the Centrica share price is tanking! And is this an opportunity?

The Centrica share price was down 8% in early trading. Our writer explores whether this is an opportunity for investors.

Read more »

Investing Articles

The Unilever share price surges! Here’s why it’s topping the FTSE 100

The Unilever share price surged by more than 5% on Thursday. Our writer takes a closer look at the company's…

Read more »

Engineer Project Manager Talks With Scientist working on Computer
Investing Articles

The AstraZeneca share price dips as the company raises full-year guidance!

AstraZeneca's biopharmaceutical business is delivering ongoing growth, so share price weakness now may be a buying opportunity.

Read more »