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The Risks Of Investing In AstraZeneca plc

Today I am highlighting what you need to know before investing in AstraZeneca (LSE: AZN) (NYSE: AZN.US).

Sales projections to haunt AstraZeneca later on?

In a bid to stave off the overtures of US rival Pfizer, AstraZeneca chief executive Pascal Soriot announced back in May that a rejuvenated research and development plan is set to turbocharge revenues to a mammoth $45bn by 2023.

This was a bold statement given that turnover at the company continues to slide, and group sales rung in at just $25.7bn last year. And as astrazeneca2Barclays Capital points out, around $15bn of this projection is generated from drugs which are yet to pass through the company’s pipeline, a risky strategy given the hit-and-miss nature of drugs testing.

AstraZeneca has already cautioned that its massive restructuring plan — which includes the construction of a brand new state-of-the-art HQ in Cambridge and establishment of several ‘satellite’ bases across Europe and the US — will not make a meaningful contribution to the firm’s revenues until 2018 at the soonest.

In the meantime the business will continue to suffer the effect of crumbling patents, such as that of cholesterol-battler Crestor later this year — this one drug alone is responsible for more than a quarter of group turnover.

Against this backdrop AstraZeneca will need to continue delivering a steady stream of good news from its extensive testing network. The firm received a boost this week when the US Department of Justice closed annexed an investigation into a trial used to gain marketing approval for its Brilinta cardiovascular drug, long identified by the business as a significant sales driver in coming years.

But given the unpredictable and often prolonged process that new products have to pass through, any setbacks could deliver a hammerblow to the company’s earnings prospects.

AstraZeneca is expected to punch a third successive annual earnings dip this year, with a 13% fall currently pencilled in by City brokers. This leaves the pharma giant dealing on a P/E multiple of 16 for 2014, above the benchmark of 15 which is generally considered reasonable value for money. And this moves to 17.1 for next year amid predictions of a further 6% fall.

By comparison GlaxoSmithKline, which in my opinion has a far more bubbly pipeline than its rival, trades on far more attractive multiples of 14.8 and 14 for 2014 and 2015 correspondingly. Given AstraZeneca’s relatively-heady premium, I believe that any signs of spluttering product development could have a catastrophic effect on the firm’s share price.

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Royston Wild has no position in any shares mentioned. The Motley Fool has recommended shares in GlaxoSmithKline. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.