Right now I’m analysing some of the most popular companies in the FTSE 100 to establish if they are attractive long-term buy and forget investments.
Today I’m looking at AstraZeneca (LSE: AZN) (NYSE: AZN.US)
What is the sustainable competitive advantage?
At the end of 2012, AstraZeneca was one of the largest pharmaceutical companies in the world, employing over 50,000 people worldwide. Furthermore, AstraZeneca’s Crestor treatment is the world’s eighth bestselling drug, with sales of around $6.3bn.
Indeed, due to its size, AstraZeneca has a certain dominance over the biotechnology market, as many smaller competitors cannot compete with the firm’s financial power and research capabilities.
Additionally, as AstraZeneca has exclusive production rights for its own treatments, the company can set prices, giving itself a wide profit margin. In particular, even after the loss of some exclusive manufacturing rights last year (which caused a 15% drop in revenue), AstraZeneca’s net profit margin still came in at 22%.
Having said that, AstraZeneca is facing fierce competition from generic producers, which are now manufacturing cheaper versions of some key drugs, after the company’s exclusive manufacturing rights expired last year.
Nonetheless, AstraZeneca’s size and global exposure mean that the company is able to stay ahead of the game, as the firm’s brand attracts talented personal.
Moreover, many larger pharmaceutical companies are now forming research partnerships, in an attempt to offset the stream of patent expirations that are affecting the industry.
Company’s long-term outlook?
With the spectre of disease always present, the demand for AstraZeneca’s products will remain constant, or even grow over the long term, as long as the company can produce treatments that are effective.
It appears that AstraZeneca is well placed to do this. Indeed, the firm has 84 new treatments under development, 13 of which are in the final stages of testing.
Furthermore, AstraZeneca has a strong balance sheet with net debt of only $2bn — a debt to asset ratio of 4%, giving the company plenty of room to acquire smaller competitors as well as new treatments for its pipeline.
Overall, there will always be a strong demand for AstraZeneca’s products and the company has plenty of treatments under development that will allow it to stay ahead of the game. Additionally, with an almost debt free balance sheet, the company has plenty of room to spend for future growth.
So overall, I rate AstraZeneca as a very good share to buy and forget.
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In the meantime, please stay tuned for my next FTSE 100 verdict
> Rupert does not own any share mentioned in this article.