Astra’s Weak
In recent years, I seem to have read nothing but bad news about pharmaceutical giant AstraZeneca (LSE: AZN) (NYSE: AZN.US). Its drugs pipeline was running dry. Innovation was in short supply. The entire business was swinging over of a patent cliff, like Michael Caine in the final scene of The Italian Job. Analysts routinely labelled it a Sell.
So imagine my surprise when I spotted its recent share price performance figures. It is up 36% over the past two years, three times the 12% return on the FTSE 100. Over the last six months, it has grown 20%. For a stock that was apparently a screaming Sell, Astrazeneca has been a great Buy.
Sell, Sell, Sell, er, Buy
It is not difficult to see why analysts called AstraZeneca a Sell. It suffered a string of setbacks with its pipeline of antidepressant, diabetes and ovarian cancer treatments. It saw profits plummet, as key brands were open to competition from generics, and with scant signs of lucrative replacements. When investors looked forward, they saw that best-selling high cholesterol treatment drug Crestor loses protection in the US in 2016.
AstraZeneca faced troubles in every market, including government cuts in Europe, healthcare reform in the US and sluggish sales in emerging markets. Sales and revenues were plunging. Chief executive Pascal Soriot was laying off staff in their thousands in a desperate bid to turn things round.
In retrospect, what looked like a stone Sell, was a bargain basement Buy. Because for all its problems, AstraZeneca was cheap, trading at a valuation of less than eight times earnings, while yielding almost 6%. It’s a lot more expensive today.
Piping Hot
So what went right? AstraZeneca’s decision to buy Bristol-Myers Squibb‘s interests in the two companies’ diabetes alliance has widened its exposure to the fast-growing diabetes market (550 million by 2030). At the start of this year, Soriot reported good progress in the company’s three core therapeutic areas of oncology, cardiovascular/metabolic disease, and respiratory, inflammation and autoimmune diseases. It late-stage pipeline now boasts 11 Phase-III programmes, and 27 Phase-II programmes. At long last, there were profits in the pipeline.
Soriot’s optimistic update made February’s full-year results even more disappointing. Profits were hit by loss of exclusivity on three key brands in 2013. Drug patents expiries will continue to cast a shadow this year. The dividend was frozen, as AstraZeneca directs money into researching new drugs, rather than rewarding investors. Its share buyback campaign remains in deep freeze.
Holding company
Your chance of a bargain has gone. AstraZeneca now trades at a pricier 12.7 times earnings, and yields ‘just’ 4.4%. Earnings per share are forecast to drop 17% this year. JP Morgan has just warned investors they may have to wait even longer for AstraZeneca’s $15.6 billion purchase of US firm Medimmune in 2007 to pan out. Regulatory approval for its immune-oncology medication may not come until 2017, and rivals could get there first. JPM labelled AstraZeneca a Sell. So does SocGen.
Given AstraZeneca’s pricier valuation and lower yield, I suspect the short-term gains have been made. The ‘Sell’ that was a great ‘Buy’ now looks a weak Hold at best.
