What a difference a year makes! Shares in AstraZeneca (LSE: AZN) (NYSE: AZN.US) are now 30% higher than they were just one year ago, with the performance of the pharmaceutical company easily beating the 1% gains of the FTSE 100 over the same time period.
So, what’s changed? Clearly, AstraZeneca’s share price has benefited hugely from the bid approaches from Pfizer, with it still appearing to include a takeover premium of sorts. However, this isn’t the full story, since the market’s perception of where AstraZeneca is headed has changed considerably since a year ago, with the future now looking a lot brighter. As such, AstraZeneca could be a great long-term play.
Falling Earnings
Of course, the ‘patent cliff’ still exists, where AstraZeneca is due to lose patent protection on a number of key, blockbuster drugs in the short run. This has hurt profits and will continue to do so for another couple of years. Indeed, AstraZeneca’s earnings per share (EPS) fell by 26% last year and are forecast to drop by another 14% in the current year. Although better, next year is still due to see a fall of 3%, which shows that the company remains in a difficult place right now.
Future Potential
However, AstraZeneca’s future looks much brighter now than a year or two ago. That’s because it has focused on rejuvenating its drug pipeline through a number of key acquisitions. An example is the purchase of Bristol-Myers Squibb‘s half of the two companies’ diabetes joint venture. This should help AstraZeneca to grow the top and bottom line over the long run, as the number of people with diabetes in the US alone is set to increase by 165% from the year 2000 to the year 2050. Further deals look likely, with AstraZeneca’s new management team ending the superfluous share buyback scheme. This allows more capital to be spent on developing the drug pipeline.
Looking Ahead
Certainly, AstraZeneca’s share price is not as attractive at £43 as it was at £33 one year ago. However, the company is in better shape and so the current price to earnings (P/E) ratio of 17.1 does not appear to be excessive for long-term investors. Clearly, a lack of further bid activity could cause the share price to weaken in the short run, but with an improving pipeline and the scope for more acquisitions, AstraZeneca could be a long-term winner and, as such, could help to pay off your mortgage.
