AstraZeneca (LSE: AZN) shares have experienced a sharp pullback. Back in late April, they were trading around the £12.30 mark. Today however, they can be snapped up for about £10.30 – roughly 16% lower.
Is this a great buying opportunity? Let’s discuss.
Why has the share price fallen?
Let’s start by looking at why the share price has fallen. Is there anything we need to be concerned about?
One driver of the weakness here has been proposed drug reforms. Back in late April, the shares took a hit after Brussels published a draft of its proposed overhaul of laws governing the European Union’s pharma industry.
The EU wants to ensure that all Europeans have access to both innovative new treatments and generic drugs. And one of its proposals involves reducing drug market exclusivity for new medicines from 10 years to eight years, after which the market will be opened up to generics.
More recently, the shares dropped in early July after the company announced the results of a Phase III three trial for a new lung cancer drug (datopotamab deruxtecan), which it’s developing with Japan’s Daiichi Sankyo.
AstraZeneca told investors that the drug slowed the progression of lung cancer in the late-stage trial. However, the trial results weren’t as good as some analysts were expecting. Unfortunately, there were some incidences of Grade 5 interstitial lung disease (fatal cases).
It’s worth pointing out that this is one of the big risks when it comes to investing in pharma stocks. When drug trials are successful, investors can do well. However, when trials deliver sub-optimal results, investors can lose money. So shares in this sector can be a little speculative in nature.
A buying opportunity?
Is this a good buying opportunity for long-term investors? I think so.
After the recent pullback, AstraZeneca shares have a forward-looking price-to-earnings (P/E) ratio 18. That’s above the UK market average. But it’s well below the multiples some of its US rivals sport. Eli Lilly, for example, currently has a P/E ratio of about 51.
I think the valuation is very reasonable considering the group is expecting to generate high single-digit to low double-digit percentage earnings growth this year.
The dividend here adds weight to the investment case. AstraZeneca is a reliable dividend payer. And right now, the yield is a healthy 2.3% (again, this is higher than many US rivals).
As for risks, there are a few to be aware of. One is the speculative nature of drug trials I mentioned earlier. AstraZeneca could have further drug setbacks in the future.
Another is the new pharma proposals for Europe. New reforms could impact the company’s revenue growth going forward.
A third risk to consider is lower-than-expected revenues from China. In its Q1 results, the company said it expects revenue from China to return to growth, and increase by a low single-digit percentage in 2023. However, given China’s slow economic recovery, this may not happen.
Overall though, I like the risk/reward set up at the current share price.
