Today I am detailing why I believe the earnings outlook for AstraZeneca (LSE: AZN) (NYSE: AZN.US) are set to remain subdued over the next year and possibly beyond.
Heavy investment not yet ready to deliver
AstraZeneca has made big statements this year in a bid to turbocharge its somewhat-bare product pipeline. From establishing a stable of state-of-the-art R&D centres across Europe, to announcing a stream of new acquisitions, the pharma play is making all the right noises in its bid to boost the number of late-stage testing assets within the next three years.
The business received a shot in the arm last month when its Xigduo diabetes-combating drug, which it developed with Bristol-Myers Squibb, received a positive assessment from the European Medicines Agency’s Committee for Medicinal Products for Human Use, taking it one step closer to a European roll-out.
And AstraZeneca also remains active when it comes to banging in new product filings, and submitted a new application to the US Food and Drug Administration in November for Naloxegol, used to tackle constipation brought on by opioid treatments.
AstraZeneca notes that its “late-stage pipeline continues to grow“, with last month’s developments adding to the three new Phase III programme starts and three regulatory filings which were accepted for review during the last quarter.
Still, the approval of new pharmaceuticals is often a bumpy ride peppered with delays and unexpected costs running into the hundreds of millions. Such uncertainties are, of course, an occupational hazard for drugs firms, but as the firm is already suffering heavily from the effect of patent expirations — this cost $350m in July-September alone in lost revenues — and a lack of immediate earnings replacements ready to take their place, waiting on such approvals is a big gamble in my opinion.
City analysts expect AstraZeneca to follow last year’s 12% earnings dip to worsen in 2013, with a 22% decline predicted to 307.4p per share. The firm is expected to put in a better performance in 2014, however, although earnings per share is anticipated to fall an additional 9% to 280.7p.
The pharmaceuticals specialist currently deals on a P/E rating of 12.4 for 2014, below a corresponding multiple of 13.2 for industry rival GlaxoSmithKline. But while the latter has invested heavily in R&D to counter the effects of patent expiries, a position expected to drive earnings higher next year and beyond, AstraZeneca cannot claim to have made the same progress. Until the firm’s restructuring drive begins to yield fruit to substantially counter the effects of loss of exclusivity elsewhere I, for one, will continue to steer clear of the stock.
