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Why AstraZeneca plc Should Be A Candidate For Your 2014 ISA

astrazenecaThe UK’s pharmaceuticals giants have been facing the ‘patent cliff’ problem for a few years now, with protection of some of their blockbuster drugs expiring and competition from generic alternatives growing.

And in the recent past AstraZenenca (LSE: AZN) (NYSE: AZN.US) has lagged behind rival GlaxoSmithKline in the race to find alternatives — Glaxo has been significantly more successful on the acquisition trail and in biotechnology expansion.

On the turn

But over the past year or two things have been changing, and I’m going to tell you why I think AstraZeneca is worth considering for some of your new 2014 ISA allowance of £11,760 (or for any still unused this year).

The effects of the patent-cliff slowdown are painfully clear, with adjusted earnings per share (EPS) now having fallen for three years in a row — culminating with a 58% fall for the year ended December 2013!

In those results, we heard that revenue had declined 6%, with a couple of blockbusters dropping out of patent protection, including the big-selling antipsychotic drug Seroquel — and Crestor, the cholesterol-lowering statin, is due to lose protection soon.

Dividends stretched

The dividend us holding up and was maintained at 280 cents per share for 2013, with the board saying it is “committed to the company’s progressive dividend policy“. But the cover is declining and payments at current levels are not going to be sustainable for much longer. So the big question is whether earnings growth will resume before any cut to the dividend is needed.

Even though 2013 results were disappointing, I think the answer is yes.

Return to strength

When Pascal Soriot took on the chief executive role in October 2012, he quickly established a road map back to growth — AstraZenenca was to divest itself of low-margin interests, focus on its key strengths, get research and development kick-started again, and get that drugs pipeline back up to strength.

And the latest results did bring us some upbeat news on those fronts.

The company’s pipeline now includes 11 candidates that have reached Phase III or registration, which nearly is twice the number at the same stage a year previously, and there are currently 19 potential candidates for Phase III starts in 2014-15.

AstraZeneca is also rapidly integrating the diabetes assets acquired from Bristol-Myers Squibb after taking full control of the two firms’ previous alliance.

What’s the outlook?

In the short term, things still look tough, with core EPS “expected to decline in the teens” in 2014. But Mr Soriot did say that he is “confident that we can return to growth faster than anticipated“.

Are the markets convinced?

With the share price up more than 30% over the past 12 months to 4,055p, even after a small dip in response to those 2013 figures, I think the answer is a clear yes. And what’s encouraging is that, with revenue still expected to be at 2013 levels by 2017, it’s with a longer-term horizon rather than the short-termism typically shown by the City.

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> Alan does not own any shares in AstraZeneca or GlaxoSmithKline. The Motley Fool has recommended shares in GlaxoSmithKline.