What AstraZeneca plc’s Investment Plans Mean For Earnings Growth

Today I am looking at why I believe AstraZeneca‘s (LSE: AZN) (NYSE: AZN.US) revenues are likely to remain under the cosh despite vast investment in research and development.

Investment programme going through the gears

As one would expect, AstraZeneca is required to chuck vast sums of money into R&D in order to stay at the cutting edge of healthcare technology and develop the next generation of super-drugs.

And the effect of patent expiration across many of its key products has hastened the need for AstraZeneca to plough huge sums into its lab astrazenecaoperations. The company is not alone in this respect, although the scale of the problem for the firm appears to be worse than that of its big-cap peers.

AstraZeneca has been late to the party in addressing this issue, although the impact of Pascal Soriot — installed as chief executive back in August 2012 — in revving up R&D work has been encouraging. Indeed, the company forked out a colossal $1.43bn in new product development in 2013, up 8% from the previous year.

Just a few months into his tenure the firm announced plans to establish three key research bases in the fields of small molecule and biologics in the UK, Maryland and Sweden. Work is expected to be completed by 2016 and includes the construction of a $500m research facility in Cambridge.

And AstraZeneca has also been snapping up firms across the globe in order to bolster its research operations. The company agreed to purchase California-based respiratory specialists Pearl Therapeutics last June for $1.2bn, and followed hot on the heels of the $323m purchase of lipids experts Omthera Pharmaceuticals in May.

… but enduring earnings woe on the cards

AstraZeneca’s patent problems have seen earnings collapse in recent times, with last year’s 26% decline representing the worst performance for many, many years. City analysts expect AstraZeneca’s steadily-improving product pipeline to reduce the rot, although the company is still anticipated to print further falls of 15% and 2% in 2014 and 2015 correspondingly.

The business of getting drugs moved from lab bench to pharmacy shelf can often be a minefield, where disappointing testing is a regular occurrence and can lead to significant delays and huge sums being poured down the drain through wasted R&D expenses and lost revenues.

Such problems are, of course, an occupational hazard for the pharmaceutical sector, and AstraZeneca has invested heavily to improve its success in this area. Still, the company cannot afford such costly slip-ups and desperately needs the next wave of earnings-driving drugs to get revenues back on track sooner rather than later. And with recent investment not expected to pay off for the next few years at least, AstraZeneca is a highly risky stock selection in my opinion.

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Royston does not own shares in AstraZeneca.