What’s Stopped Me From Buying AstraZeneca Plc Today

Today, I am looking at AstraZeneca (LSE: AZN) (NYSE: AZN.US), and deciding whether to add the company to my personal stocks portfolio.

Patent expiration problems continue to gallop on

AstraZeneca’s half-yearly report released this month showed revenues, on a constant exchange rate, fall 8% in January-June to $12.62bn. This in turn drove core operating profit 16% lower to $4.38bn. The effect of patent expiration across many of its key products moderated in the second quarter, although revenues and core operating profit still fell 4% and 10% in the period.

Promisingly, AstraZeneca announced that its product pipeline had added three promising late-stage assets in core therapeutic areas of cardiovascular/metabolism and respiratory diseases”. The company is undergoing significant transformation plans at its R&D operations across Europe in order to compensate for the loss of key patents and undergird future earnings growth.

But the firm seems to be behind many of its rivals such as GlaxoSmithKline in significantly addressing the issue of exclusivity loss and bringing online new earnings drivers. The new product additions are a promising development in the firm’s transformation plan, but with new drugs taking years to hit the shelves from initial testing, investors should be braced for more near-term pain.

Earnings slump predicted to last through 2014

City forecasters expect last year’s 12% earnings slump to remain in vogue well into the medium term. Earnings per share are expected to slip 19% this year, to 335p, before falling a further 6% in 2014 to 316p.

The pharma play currently changes hands on a P/E ratio of 9.7 and 10.3 for 2013 and 2014 respectively, figures anchored around the widely-regarded bargain watermark of 10 times prospective earnings. But in my opinion this simply reflects the dearth of earnings catalysts at the firm and thus strong likelihood for shareholder returns to encounter severe pressure.

Pick up the prescription for bountiful gains

On the dividend front, analysts have pencilled in a full-year payout of 285 US cents for 2013, with a rise to 287 cents expected next year. These payments carry yields of 5.7%, comfortably beating the 3.1% FTSE 100 average and aggregate reading of 2.4% for its pharmaceuticals and biotechnology rivals.

AstraZeneca kept the dividend on hold at 280 cents last year as earnings crumbled, and I believe that future dividends could come under fire should further earnings pressure materialise as expected. In my opinion the pharma giant represents too much of a gamble for investors at present, and I will be waiting for more progress from its product pipeline before I consider parting with my cash.

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> Royston does not own shares in AstraZeneca. The Motley Fool has recommended shares in GlaxoSmithKline.