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3 Worrying Reasons Why AstraZeneca plc Is Ready To Plummet

Today I am looking at why I believe AstraZeneca (LSE: AZN) (NYSE: AZN.US) remains an unappealing growth selection.

Pipeline problems set to rumble on

AstraZeneca has sustained consistent revenues pressure in recent times, as the effect of lapsing patent protection for many of its key drugs has weighed heavily. This prompted revenues to fall 18% during the first half of 2013 on a constant currencies basis, to $12.62bn, which in turn pushed core operating profit to $4.38bn, a 16% drop.

The firm has been conspicuous in its lack of activity to develop new earnings catalysts through its R&D operations. Under new CEO Pascal Soriot, AstraZeneca has initiated ambitious plans to transform its development structure across Europe to mitigate the effect of lost patents on turnover. However, the work is not expected to be completed until 2016 at the earliest, leaving the firm’s earnings outlook in a quandary for the foreseeable future.

Jury out on when acquisitions will bear fruit

The company announced last month that its biologics research and development division, MedImmune, had purchased US-based Amplimmune for an initial $225m and which could lead to a further $275m based upon hitting certain development milestones.

The Maryland firm is a biologics specialist focusing on creating therapeutics in cancer immunology, and provides exciting potential for AstraZeneca’s product prospects in this area. The company has made a number of acquisitions of the past year to boost its pipeline, although synergies with its existing operations — as well as the production of potential earnings winners — can, of course, take a number of years to be realised.

No earnings turnaround in sight

Indeed, City analysts expect a dearth of fruit from its product pipeline to result in continued earnings weakness well into the medium term, following on from last year’s 12% earnings per share (EPS) drop.

Indeed, AstraZeneca is anticipated to record accelerating earnings decline in 2013, with a 21% EPS drop to 326p pencilled in. And a further 6% decline is expected next year, to 307p. The business currently deals on what is generally considered bargain basement territory below 10 for both 2013 and 2014, with readings of 9.7 and 10.3 for these years. This is also much lower than a forward reading of 14 for pharma rival GlaxoSmithKline.

But, in my opinion, this lowly rating is fully justified given a lack of notable earnings drivers, and I would like to see some progress from its development channel before parking my cash into this particular stock.

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